The EUR/USD spent most of the night trading tightly around the 1.3800 figure as offsetting economic reports made it difficult for traders to establish a direction in the pair during Asian and early European sessions. The contradictory data points started on the consumer side and moved on to the manufacturing sector. French consumer spending surprised to the upside rising to 1.6% from 0.7% expected. This was the best reading since August 2006 buoyed by sharp reduction in unemployment in Euro-zone’s second largest economy. On the other hand, Italian Retail Sales showed a far more tepid rise of 0.1% vs. 0.3% projected. The Italian data however was for May and therefore relatively dated perhaps simply reflecting a delay in consumer pick up.

On the manufacturing side the news was not nearly as benign as EZ advance PMI readings fell to 54.8 - materially weaker than the 55.5 forecast. While EZ manufacturing remains well above the 50 boom/bust line, today’s flash estimate registered its lowest value in nearly a year and half slipping below the 55.0 level for the first time since February of 2006. Although, like the consumer readings, the manufacturing data was somewhat ameliorated by the fact that New Industrial Orders rebounded to 1.7% from -0.6% drop the month prior, today’s report nevertheless suggests that EZ manufacturing recovery has peaked under the pressure of high exchange rates. As we noted yesterday, “The producers in the EZ have been surprisingly effective in coping with the competitive pressures of a strong currency however such efficiency cannot last forever and the effect of a strong euro is likely to dampen demand sooner rather than later. “ Today’s weaker than expected Manufacturing PMI indicates that the IFO report due Thursday may surprise to the downside as well.

Meanwhile despite euro’s lackluster trade, the pound continued to show strength against the dollar. The pound’s relentless rise was supported by speculation that BoE will hike rates to 6% once again in August and the unit broke above the 2.0650 level on momentum buying. By midday London trade however, the unit retraced much of the overnight gains as the CBI Industrial trends survey printed at -6 far worse than the month prior, recording its first negative reading since January. The survey was dragged down by a sudden fall off in export orders, indicating that just as in the case of the EZ the higher value of the currency is beginning to impact the competitiveness of the UK industrial sector. The sour results in the CBI report and last night’s smaller than expected rise in house price growth may be early indications of a broader slowdown in the UK economy. For the time being the market is ignoring any potential implications of this news, driving cable higher on momentum alone. However, if future data points continue to confirm this thesis, bullish sentiment can quickly turn and sterling could face a to multi-hundred point correction in the coming weeks.

Boris Schlossberg is a Senior Currency Strategist at FXCM.