The Euro is Struggling, But Services are Strong. Losses in Data
The euro remained under pressure on Tuesday as statistics revealed that eurozone manufacturing production fell this month, despite a rise in the more inflation-sensitive services sector.
The euro has been suffering versus the dollar in particular over the last several weeks, as strong US labor statistics and signs of persistent inflation have increased the likelihood that US interest rates will rise faster than many had predicted.
The flash Composite Purchasing Managers' Index (PMI) for the eurozone, considered a solid indicator of overall economic health, surged to its highest level in nine months, according to S&P Global.
According to Tuesday's poll, a measure of service sector activity surged to its highest level since June, but manufacturing fell at a faster pace.
"The manufacturing data are disappointing," said Jeremy Stretch, global head of currency strategy at CIBC Capital Markets.
Wage inflation is often more persistent in the services sector, and strong activity there suggests the European Central Bank is more likely to hike interest rates, so strengthening the euro, he added.
The euro was recently down 0.2% versus the dollar, trading at $1.0667. Thus far in February, it has lost approximately 2% of its value versus the US dollar. Yet, this is a bit of an oddity. It has gained 1.4% against the Japanese yen.
The US dollar index has risen about 2% so far in February, putting it on course for its best monthly performance since a 3.2% advance in September. It is now trading at 104, much below the six-week high of 104.67 set on Friday.
"The data momentum has been encouraging of late, but it will be difficult to estimate where we should be at this stage of the cycle in the coming months," Deutsche Bank strategist Jim Reid said.
"There has no doubt been a significant improvement from lower gas prices and relaxing banking conditions, but we have yet to see anything close to the full lag of monetary policy filter through to the United States and Europe," he added.
Later on Tuesday, the United States will release manufacturing statistics, while Friday's core personal consumption expenditures index - the Federal Reserve's favored barometer of price pressures - might give additional insight into what interest rates will do this year.
The dollar was up 0.23% versus the yen at 134.6, while it was up 0.4% against the Australian dollar at $0.68875, despite Reserve Bank of Australia minutes showing officials did not discuss suspending rises at their February meeting.
As statistics indicated that UK economic activity was significantly better than predicted in early February, the sterling reversed course and surged 0.3% against the dollar to $1.2071 and 0.5% against the euro to 88.36 pence.