The Greenback Remains Resilient As The Bulls Drive Equities Higher

The big surprise of the day was the preliminary eurozone CPI. The headline jumped from -0.3% to 0.9% year-over-year, and the core rate soared to 1.4%, a five-year high, from 0.2%. The surge is about technical factors, like the end of the German VAT holiday, a delay in French seasonal sales, and modifications in the weighted of the CPI basket. What is one to make of it? The takeaway is that inflation is low in the eurozone, but deflation likely overstates the case. 

The UK final PMI readings were revised higher from the preliminary estimates but remain lower than December and below the 50 boom/bust level. The social restrictions and Brexit disruptions risk a contracting quarter. The services PMI stands at 39.5, up from the 38.8 flash reading but down from December's 49.4. The composite PMI is at 41.2, better than the 40.6 initial estimates, but below the 50.4 seen in December. The Bank of England meets tomorrow. No change in policy is expected, and the focus is on the forward guidance on negative rates. The BOE is likely to say that while it is a policy tool, they are not ready to deploy it. 

The euro set a new two-month low near $1.2010 today in early European turnover.  The $1.20 is psychological support, but the next retracement target of the rally since the US election is near $1.1975.Key resistance is seen in the $1.2055-$1.2065 area. For its part, sterling remains within its two-week trading range (~$1.3600-$1.3750), but pressure on the lower-end appears to be building. The cross against the euro has helped sterling's performance, but the euro's downside momentum is easing around GBP0.8800, its lowest level since late May. If $1.36 is given, sterling could slide the better part of a cent.  


Last month, when the dollar did not sell-off in response to the unexpected loss of jobs in the ADP estimate, it confirmed our suspicions that the bad news had largely been discounted by the decline since the early November election. This time a small gain (~50k) is expected. Bloomberg's survey's latest median is for a 70k rise in the January nonfarm payrolls out on Friday. The final PMI and ISM services index are also on tap. The increase in US auto sales reported yesterday to 16.63 mln unit pace (seasonally-adjusted annual rate), the highest since last February, bodes well for retail sales (due February 17). However, the focus is on fiscal policy.  

There are two elements. First is the quarterly refunding announcement, and it is expected that Treasury will seek to sell $128 bln in coupons next week. Recent auctions have been well-received, and yields at the long-end are near 2-3 week highs. To truly count as a concession ahead of the auction, it needs to sustain the gains through the employment data. Earlier this week, Treasury dramatically cut the anticipated borrowing needs for the quarter to $274 bln from $1.127 trillion anticipated previously on different assumptions about the fiscal stimulus.  

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Read more by Marc on his site Marc to Market.

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