A New Month has Similar Feel

January finally skidded to a close at the end of last week and many investors were hoping that risk off trade ended with the first month of the year. The tone continues to feel like investor sentiment is weak as bonds continue to reflect declining yields. Economic data to start the month was relatively soft although European data was slightly better than expected.

The Eurozone purchasing managers index climbed to a 2.5 year high printing a reading of 54 in January from 52.7 in December. Germany led the expansion while Spain hit a 45-month high and France showed signs of stabilization. The data is consistent with GDP growth of 0.4-0.5% in Q1.

In the U.K. the PMI reflected a weaker manufacturing scenario. Growth in manufacturing softens more than the consensus estimates. U.K. manufacturing PMI slipped to 56.7 in January from 57.2 in December and missed consensus of 57. According to Markits, who reported the PMI, recent months have seen the largest surge in demand for U.K. investment goods for two decades, while new export orders are rising at one of the fastest rates ever recorded by the survey as global demand also undergoes a broad-based upswing.

Despite the better than expected EU data, Eurozone yields declined at a faster rate than US yields driving the yield differential to a new high in favor of the greenback. The EURUSD sliced through support and is poised to test the 1.34 level. Short term resistance is seen near the 10-day moving average near 1.36.

Momentum on the currency pair is negative as the MACD (moving average convergence divergence) index generated a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread. The RSI is printing near 38, which is on the lower end of the neutral range.