Manufacturing PMI to Decide Sterling’s Direction Today

USD: Sequestration Kicks in Fri, No Deal in Congress
EUR: Still Crippled by Italian Election Concerns
CAD: Hits Fresh 7 Month Lows Ahead of GDP Data
AUD: Manufacturing Activity Rebounds
NZD: Sharp Improvement in Business Confidence
JPY: Abe Nominates Kuroda as BoJ Governor

The British pound ended the North American trading session unchanged against the U.S. dollar and slightly higher against the euro. Consumer confidence remained held steady in the month of February according to the GfK who called the development encouraging. While the survey of consumer sentiment was taken before Moody’s downgrade, it is still surprising that sentiment held steady despite the decline in consumer spending. It appears that there is a major disconnect between how consumers feel and how they spend. Nationwide house prices and the country’s PMI manufacturing report is due for release.

German unemployment showed further signs of improvement as Europe’s largest economy was able to reduce the rolls by another -3K in March. This was slightly less than the -5K figure the market was expecting but continued the positive trend that has been in place for the past two months.

The gradual improvement in the German labour conditions has been the primary reason why sentiment readings from both the business and the consumer sector have remained relatively buoyant despite the recessionary background elsewhere on the continent. Indeed French consumer spending figures were woeful printing at -0.8% versus -.0.1% eyed.

It’s becoming increasingly doubtful if Germany alone can pull the Eurozone out of the recession, despite its impressive employment demand which should help to turn growth positive in Q1 of this year. With political situation in Italy still unclear as various parties have not begun negotiations, the markets remain wary and the EUR/USD sold off on the news after a dip in EZ equity indices revived risk aversion flows.

A large part of the nervousness in the market yesterday was caused by the Senate’s decision to reject a pair of proposals that would have helped avert the automatic spending cuts set to kick in March 1st. In doing so, $85 billion worth of spending cuts will now begin. While stocks have fallen and the dollar has risen, the mild decline suggests that investors are not terribly worried about the implications of sequester. We’ve been down this road before with the debt ceiling and survived. The numbers this time around aren’t enormous – only $50B worth of cuts are expected this year and not all of it will kick in at one time. Government agencies are mandated to give their workers at least 30 days notice and this means that if Obama issues his sequestration order today, Federal agencies will let their workers know Monday March 4th at the earliest and the cuts won’t take place until April 4th. This means that effectively the Obama Administration has another 30 days to come up with a deal to cancel and avoid the cuts. The more important deadline is March 27th, when the government runs out of money and will be forced to shutdown if no additional measures are taken. Of course, Republicans and Democrats want to avoid a government shutdown and House Republicans will be voting on a measure that would finance the government until the end of the year. Investors are clearly holding out hope that a last minute deal before the March 27th deadline will occur.

GDP numbers from Canada and Sweden are both released today, and neither is likely to be particularly inspiring. The Swedish data is likely to show a sharp Q4 contraction which may take away some of the recent optimistic tone from the SEK, while the 0.6% rise expected in Q4 Canadian GDP is below even the revised BoC expectations. Given recent relative CAD weakness, the CAD may outperform today.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

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