Global Services Data Sends Mixed Signals

US Dollar Index – (+0.15%)
• An interesting trading day on Wednesday, with services data the main point of interest. As it turned out it was quite an obvious contrast between poor data from Europe and good data from America. The day overall favoured the dollar mildly, with losses in the morning session being recovered later on in the session. The most notable price action was a bounce in USD/JPY and USD/CAD recovering mildly from the recent sell-off.
• Europe was the first to report, with Spain, Italy and France all showing improvement in their services PMI. Italy was possibly the best performer, indicating a move much closer to expansion, up to 49.4 from 47.9 last month. Germany on the other hand reported a decline from 53.6 to 53.1 and this in turn contributed to the overall headline index for the Euro zone falling slightly from 51.9 to 51.6. Forecasts had sided with an unchanged number for the services sector, so the slight miss only prompted a tepid sell off to 1.3510 in EUR/USD. Poor initial US data in the afternoon session (see below) did see a high of 1.3553 traded in the cross thereafter, but this proved to be short lived as better American numbers later on took priority and EUR/USD slipped back towards 1.3500. Other economic data from Europe had little impact in the morning session; retail sales were reported much worse than expected, down 1.6% in January and 1% lower from a year earlier.
• The UK followed the Europe’s lead and echoed a poor services figure. Services PMI for the UK came in at 58.3 from 58.8 previously and although this was a similar decline to the Eurozone, the reaction on the GBP was that bit more evident. Cable dropped from 1.6305 to an intraday low of 1.6255, but managed to recover to 1.6280-90 late afternoon.
• Economic data from America wasn’t all good as mentioned above. ADP non-farm payrolls started off the reporting session for the US, showing 175k jobs being added to the private sector in January. Although this was close to the 180k official forecast, the revision for December was moved lower by 11k jobs. With so much focus being paid to the headline non-farms on Friday, this did unsettle slightly and cause some USD selling.
• Data later in the day seemed to settle the markets down though, with services numbers restoring some confidence. ISM Non-manufacturing PMI rose from 53.0 to 54.0 and outperformed consensus for a 53.7 result. Some USD strength returned to the market, but as mentioned above, reaction all day has been subdued. Main concentration remains on the non-farm payrolls data due for release on Friday. We continue to side with a stronger number, with our true focus actually centring on the revision for December.