The dollar fell on Wednesday after strong PMI data and rumours of a breakthrough in Greek debt talks helped lift risk appetite. U.S Manufacturing PMI rose to a 7-month high of 54.1 versus a previous print of 53.1, although it failed to reach median forecasts of 54.5. The fact that the statistic has stayed above the 50 level for 30 straight months, signifying consistent expansion in the sector lifted hopes that the U.S could be well on the road to recovery and boosted global risk appetite. Sentiment was also lifted by unconfirmed reports that the Greek PSI deal was close to be struck with a resolution possibly as early as tonight. Other data was also broadly positive with Construction Spending MoM (Dec) up by 1.5% versus 0.5% expected and 0.4% previous and Prices Paid ISM also above estimates with a print of 55.5 versus 50 expected and 47.5 previous.

   The euro rallied after better-than-expected data and an improved outlook for Greek debt negotiations led to a rise in risk sentiment. Greek Finance Minister Venizelos said they were "one step away" from finalizing the debt-swap agreement with private bond-holders; and the PSI would be greater than the one agreed in July, with a haircut of about 50% on nominal value and 70% on net present value On the data front Euro-zone PMI Manufacturing came in at 48.8 versus 48.7 estimated - which was the same figure as in the previous month. German PMI, meanwhile, came in at 51.0 versus 50.9 expected and 50.9 previous; Italian PMI at 46.8 versus 45.3 expected  and 44.3 previous; French PMI remained unchanged and in-line with expectations at 48.5. The Euro-zone Consumer Price Index estimate YoY for January was 2.7% versus 2.7% expected and 2.8% previous. There was more good news from the bond markets after Portugal sold 3 and 6 month bills with yields sliding to 4.07% versus 4.35% at the last auction on the 3-month and also dropping on the 6-month.

   The pound rallied against most counterparts on Wednesday after expectation-beating Manufacturing PMI (Jan) rose to 52.1 - well above expectations and the important 50 level which distinguishes expansion from contraction; the previous month's print was 49.7. The result helped combat fears of a double-dip recession and the BOE using further asset purchases to stimulate the economy. It broke the run of poor data and lessened the likelihood that more quantitative easing would be unveiled at the February rate-meeting which has been targeted as the most probable time for a increase in stimulus. Other data included Nationwide House Prices which slowed their increase – showing only a 0.6% level growth YoY in January, compared to expectations of a 1.2% rise and a 1.0% increase previously; MoM prices fell by -0.2% compared to -0.2% expected and the same previously.

   The yen fell on Wednesday after a rise in global risk appetite reduced demand for the safe haven currency. Better-than-expected manufacturing in Europe, the U.S, China and the U.K all contributed to a rise in sentiment, which pushed the euro and pound higher but weighed on the dollar and the yen. The Nikkei shrugged off disastrous earnings data from major exporters and continued to rise as expectations improved after reports that euro-zone debt talks in Greece were close to a resolution. The strengthening effect of the lessening interest rate differential with the U.S, which helped the yen appreciate last week tailed off after both commentary and data implied the ultra low interest rate pledge - until 2014 - made by Bernanke at the FOMC last week was not set in stone but dependent on the "evolution" of the economy. On the data front Labour Cash Earnings YoY in December slid to -0.2% versus -0.3% expected whilst Vehicle Sales in Jan rose by 40.7% compared to 23.5% previous.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst