nvestors appeared to completely overlook a recovery in Eurozone data yesterday in favour of some solid numbers out of the US. February’s Eurozone PMIs showed a welcome upward revision, allaying some fears over an additional slowdown in the bloc in the first quarter of this year, following a fairly dire final quarter of 2018. The crucial composite index rose to 51.9 after investors had eyed a 51.4 reading. This was driven almost entirely by a solid performance in the dominant services sector.

Probably the main rationale behind the lack of an upward move in the Euro following Tuesday morning’s better-than-expected EZ PMI data is the perceived lack of impact it will have on this week’s ECB communications. The European Central Bank will be announcing its latest policy decision tomorrow afternoon. While no change in policy is expected, the market is bracing for a downwardly revised growth forecast for 2019.

Comments from President Draghi will, as always, also be key. Any suggestion that a new round of the TLTRO (long term loans issued to banks) could be on the way would be a Euro negative, and could lead to renewed weakness in the currency this week.

US economy continues to power ahead

Tuesday’s US non-manufacturing PMI from ISM was even more impressive than yesterday’s Eurozone data, sending the US Dollar higher across the board.

The index smashed expectations, coming in at a stellar 59.7 versus the 57.3 consensus, its fastest pace in three months. As we mentioned last week, there appears very little signs that a recession in the US is remotely on the cards any time soon. The US economy continues to grow at a pace far exceeding much of the developed world which, we think, should keep the US Dollar well supported this year.

It will now be interesting to see whether this encouraging economic news has any bearing on the Fed’s March communications, namely its updated ‘dot plot’.

BoE Governor Carney talks up interest rates hikes

Sterling had a fairly topsy turvy day yesterday. The UK currency slipped by over half a percent in morning trading on Tuesday following comments from Labour shadow chancellor McDonnell that stated few MPs in Jeremy Corbyn’s party would back Prime Minister Theresa May in next week’s parliamentary vote.

Some pretty hawkish comments from Bank of England Governor Mark Carney did, however, allow Sterling to recover the entirety of its losses yesterday afternoon, with the Pound ending London trading unchanged versus the US Dollar. Carney stated that the market was underestimating the possibility of additional monetary tightening from the central bank, given that recent forecasts from the BoE had showed above target inflation over the next three years.

The market is currently discounting the possibility of a hike from the BoE in 2019 following some recent soft inflation and growth data. Carney’s comments do, however, suggest that a rate increase in the next twelve months remains entirely possible, particularly should we get a smooth and orderly Brexit in the interim.