Euro Firms on Supportive Data - Will 1.5750 Give Way?

It was a very quiet range bound night of trade as currency markets awaited the dual central bank decisions tomorrow from both the ECB and the BoE. In the meantime the EURUSD firmed on slightly better than expected German Trade Balance data which showed a 16.9 Billion euro surplus versus 15.7 Billion projected. Germany continues to do the yeoman’s work for the region maintaining its level of exports despite the obstacle of higher exchange rates and remains the primary reason for EURUSD strength.

News out of the broader region was not as friendly as the final reading of EZ GDP printed exactly in line with expectations showing that growth slowed in Q4 of last year. Most notable in the GDP report was the fact that consumption declined by -0.1% - its worst performance since 1995. With demand only slowing further in Q1 of 2008, the forecast for EZ GDP does not look promising and it is likely that the region will record another below trend number going forward.

Meanwhile news out of the UK was slightly more positive as both Industrial and Manufacturing production results improved this month. IP rose 0.3% vs. 0.1% expected while MP gained 0.4% vs. forecast of flat growth. The report helped boost the pound above the 1.9700 level and pushed EURGBP lower by about 10 points in its immediate aftermath. The cross had scaled the record high 8000 level earlier in the night, but failed to hold it.

The positive surprise from the manufacturing sector was a welcome sign of relief to beaten up pound bulls and suggests that BoE will lower rates by maximum of 25bp at tomorrow’s MPC meeting. Cable has been battered on assumption that the BoE will be the next major central bank to begin lowering rates in earnest, but tonight’s data suggests that Mr. King and company may continue to follow their cautious policy path for a while longer. In any case with cable woefully oversold against the euro at the 8000 level, the cross may be in for a correction as traders re-adjust their expectations.

With only Wholesale inventories on tap in the North American session trading may continue to be quiet ahead of tomorrow. The EURUSD has had a difficult time clearing the 1.5750 level in the past several sessions and it will interesting to see if today’s mildly positive tone will finally push it through that zone of congestion.