EU PMIs set to show improvement in February

On Friday, European markets are expected to open modestly positive after Asian stocks inched higher as markets digested more signals on U.S. monetary policy and positive Chinese economic data. Japan's Nikkei 225 index surged on a soft inflation reading from Tokyo, while China's indexes traded in a flat-to-high range. Overnight in the US, stocks were initially under pressure but rallied in the afternoon after Bostic's remarks. Raphael Bostic said he thinks the Fed can stick with quarter-point interest rate hikes, though some other officials have said they are open to hiking by half a point. The S&P 500 is flirting with its 200-day moving average, and a drop below that level could signal more selling.

The dollar appears offered after investors digested some hawkishness from Fed speakers and keep favouring a 25-bp rate hike at the March 22 meeting. The US dollar index keeps its erratic performance around 105.00, as the US inflation figures showed consumer prices remain elevated, the labour market remains tight and the economy maintains its resilience. Moreover, the yield on the benchmark 10-year Treasury note has broken above the 4% psychological barrier and should continue to move higher. At the same time, the implied default probability on U.S. Treasury bonds has increased to 11.3%, up significantly from the 3.3% probability prevailing at the beginning of the year. A potential default could cause major market dislocation and a sharp slowdown in economic activity.

FX markets

The EUR/USD pair failed to capitalize on stronger-than-expected inflation data for February and closed Thursday in negative territory. The pair is consolidating between the 50 and 200-day EMAs, while buyers are attempting to reconquer the week’s high at around 1.06935.

GBP/USD suffered heavy losses and closed below 1.2000 on Thursday. Boris Johnson said he will find it "very difficult" to vote for the new Brexit deal. Sterling is trading in a descending flag pattern while sellers are challenging the sub-1.1900 psychological support level to extend the fall.

USD/JPY snapped a three-day losing streak on Thursday, while buyers trying to keep the ground above 136.00 in Friday’s trading session.

Events of the day

It is a busy day in the financial markets, with plenty of data releases and speeches from key policymakers.

India's S&P manufacturing purchasing managers index for February came in at 55.3, which was above its long-run average of 53.7. The report noted that the domestic market was the main source of new business growth.

China's service sector activity expanded at the fastest rate in six months in February, with new business growth accelerating to the highest in almost four years.

In February, Japan's services sector expanded at its fastest rate since June 2022, a private survey showed. The survey indicated that business activity rose sharply midway through the first quarter of 2023.

Tokyo's consumer price index rose by 3.3% in February, in line with economists' expectations, while prices excluding food and energy rose by 1.8%.

Starting off in Europe, we have the release of Services PMI data from several major economies, including Spain, Italy, France, and Germany. The numbers are expected to show a modest improvement from the previous month, indicating that the services sector in these countries is slowly recovering from the pandemic-induced slowdown. Additionally, ECB's De Guindos is scheduled to speak, which could provide insights into the central bank's monetary policy stance and future plans.

Across the pond, Canada will release data on building permits and labour productivity, which could impact the performance of the Canadian dollar in the short term.

In the United States, we have the release of the ISM Non-Manufacturing PMI and employment data, which are closely watched by investors as they provide insights into the health of the services sector and the overall labour market. Any surprises in these numbers could result in a sharp move in the US dollar and stock markets.

Furthermore, we have speeches from FOMC members Bostic and Bowman, which could provide further clarity on the central bank's stance regarding the economy and monetary policy. Any hints regarding interest rate hikes or tapering of asset purchases could cause a stir in the markets.

Lastly, the day concludes with the release of the Baker Hughes Oil Rig Count, which provides information on the number of active drilling rigs in the United States. This data is closely watched by investors as it provides an indication of future oil production levels and can impact the price of crude oil.