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European Session – Pound weak after UK inflation data

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113The euro retraced all of its losses made yesterday against the dollar and rose back above the key 1.1400 level in the European session. Despite the failed Greek debt talks at the Eurogroup meeting on Monday, investors chose to put their concerns aside for now until there are more developments on this issue, hopefully on Friday. The president of the Eurogroup, Jeroen Dijsselbloem, who chaired the meeting on Monday, told Greece it had until Friday to request a six-month extension of its bailout which expires on February 28. There is some optimism in the markets that Greece will ease back on its demands and reach a compromise.

Meanwhile, the German ZEW data today helped lift the euro, which hit a European session high of 1.1448 from a session low of 1.1336. The ZEW index of economic sentiment climbed for the fourth straight month, to 53.0 in February, following a reading of 48.4 in January, though it came below forecast for a reading of 55.

The euro was also performing well against its other major counterparts, rising against the pound to a high of 0.7443, up from a session low of 0.7377. Against the yen, the single currency hit a high of 135.95 from a low of 134.41. EURCHF hit its highest since the SNB removed the exchange rate cap, peaking at 1.0645.

Other important data today included the UK inflation numbers which fell to the lowest on record. Headline CPI fell in January to 0.3% year-on-year from 0.5% in December. The drop in inflation reflected the fall in oil prices. However, lower inflation rates would likely delay the first rate hike by the Bank of England. Sterling was volatile after the release of the data, initially rising to a high of 1.5401 where it found resistance and fell back down to 1.5342.

The dollar bounced back against the yen to recover yesterday’s losses to reach 118.94. It briefly dipped on the data to 118.66 after the Empire State manufacturing index fell more-than-expected in February to 7.8 from a previous 10. Economists had expected a reading of 8.5 this month. Other US data showed the NAHB Housing Market Index for February came in at 55 versus a 58 estimated and below the prior month’s 57. Meanwhile, Wednesday’s Bank of Japan policy announcement is the main near term risk for this pair. Expectations for further BoJ easing have been pushed back, which could help buoy the yen.

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