Dollar Mostly Firmer, Sterling Higher

The US dollar is firmer against most of the major and emerging market currencies, with the notable exception being sterling, which has ben boosted a much stronger than expected services PMI (57.1 vs 52.6 in Feb).

Sterling reached $1.6250  but is over-extended on the short-term basis and a break back below $1.6200 would suggest the day's high is in place.  The data may have been skewed by a blip in government spending. .  With the UK eocnomy expanding after a contraction in Q4, many see the risks increasing of BOE ratye hikes, but not right away.  The short-sterling futures curve has steppened sharply.  The implied yield in June is 2 bp higher, but in Dec 6 bp higher. 

Portugal was downgraded by Moody's by one notch and the rating agency maintained a negative outlook.   The Portuguese bond market remains under pressure and the government will be selling bills tomorrow.  Note that in the CDS market, it now costs more to insure Portuguese debt than Irish debt (586.5 vs 581.6) which would imply a perceived greater likelihood of default. 

Euro zone service PMI came in at 57.2 from 56.9 in the flash reading and is the best since Aug 07.  Retail sales disappointed with a 0.1% decline and are only up 0.1% year-over-year. 

China hiked interest rates 25 bp.  It has been expected and comes ahead of next week's slew of data, which wil include loans and inflation meaures.  The early call is for CPI in China to rise from 4.9% to 5.2%. 

For the day, I look for the euro to find support near $1.4150 and do not think that Bernanke's comments break any new ground and expect the FOMC minutes to show a heightened discussion of inflation and inflation expectations, but confirm that there were no dissents about continuing with the Treasury purchases.    I look for the dollar to firm back toward JPY84.60 or so, but think the JPY85 is safe. 

I think euro sterling is interesting near GBP0.8725 or so.  That is where the 20-day moving average is seen and it has not traded below that average in a month.   The risk is clear.   But it is on the low of the day so, look for the downside to exhuast first and short-term momentum indicators are stretched.   Lastly,  the euro is testing resistance against the Swedish krona is also offering a low risk entry point to buy krona.