THE BIG PICTURE
The euro’s rise against most currencies overnight raises a fascinating point: does Cyprus matter to the markets? This may be the gamble that the EU is making. Their brinksmanship depends on investors thinking that this small island is not systemic to the Eurozone. One can only imagine what the market’s reaction would be if Italy, for example, shut its banks for over a week as Cyprus has now decided to do. The stalemate between the two sides continues and the market will watch for any movement, but with no pressure to reopen the banks for five more days, we do not expect a breakthrough today.
The FOMC meeting was largely a non-event as there were no significant changes in either the post-meeting statement or the Fed’s guidance about its intentions. This contrasts with the picture at other central banks, which in most cases are starting to shift from a neutral to a loosening or from a tightening to a neutral policy, and is one of the main reasons why we expect a stronger USD over coming months.
The economic focus today will be on the purchasing managers’ indices (PMIs) coming out around the world. China’s manufacturing PMI rose to 51.7 in March from 50.4, above the consensus. The Eurozone PMIs are expected to rise, but the gap between Germany and France is forecast to narrow only slightly, and the gap between the US and Europe is expected to widen further. That should support USD and keep EUR/USD trading within its recent range.
The global PMIs may move the market somewhat, but any major moves will depend on Cyprus. Any Plan B will need to obtain approval from Parliament around 1600 GMT.
With forecasted improvements in Eurozone PMIs, we may witness a break of the weak resistance at 1.2950 with the rate possibly finding new resistance at 1.3025 once the US PMI is announced. However, possibly disappointing Spanish bond auctions, which normally would not receive much attention, may serve to highlight the weaknesses at the currency bloc. Support may come at 1.2860, around the 200-day MA.