Mixed Manufacturing and Services PMIs across Europe

Markets continue to speculate about the likely stance that the Fed will adopt in its meeting this week, ahead of the New Year. With recent economic and labour market data offering a pleasant view of the US economy, it remains to be seen if the outgoing Fed Chief, Ben Bernanke, takes steps towards ending his ultra loose monetary policy stance or leaves the task to his successor Janet Yellen, who assumes office next year. In the Euro zone, the just out mixed manufacturing and services PMI prints have added to the uncertainty about the currency bloc’s recovery status. Meanwhile, important economic releases during the week on the home and global front will enable investors to gauge where the world economy is headed in the forthcoming months.

Pound Sterling – UK Markets

The lack of decisive economic data together with speculation that the Fed will taper QE3 later this week, weakened Sterling against the majors on Friday. Additionally, the BoE Chief Economist, Spencer Dale’s comments that the central bank will only raise interest rates when the UK economy experiences an extended period of growth further dampened investor sentiment. However, domestic housing market data continues to confirm the robust gains in the nation’s housing sector, with Friday’s construction output showing a rise for October, fuelled by a large increase in house building activity. Additionally, today’s Rightmove report on housing indicated a further rise in the UK house prices which continue to spiral upwards. Meanwhile, Sterling is trading on a firmer footing against the greenback in today’s trading session. With little on the domestic macro front, the Pound-US Dollar pair will take direction from a string of important US economic releases later today. The two crucial barometers for future BoE policy decision, consumer price inflation and unemployment reports, will be closely scrutinised by investors this week, while minutes of the BoE meeting will also gain market attention.

US Dollar – US Markets

The greenback has nudged lower against the majors this morning ahead of the domestic manufacturing PMI and industrial output data later today which are both expected to show an uptick. Ben Bernanke will preside over his final meeting beginning tomorrow as the Fed Chief. With all eyes set on the outcome of the meeting, today’s industrial and manufacturing reports and tomorrow’s consumer price inflation print are likely have a bearing on the central bank’s decision, after upbeat labour market and growth data during the past two weeks have shown that the US economic recovery is gaining momentum. Any form of scaling down by the Fed in its meeting this week will support the greenback against its peers in the sessions ahead. On Friday, the US Dollar searched for direction against the common currency as investors preferred to stay on the sidelines ahead of the Fed meeting. Furthermore, weak producer price inflation report highlighting weakening inflationary pressures in the world’s largest economy, weighed on the greenback’s movement against the majors. Apart from the Fed meeting and the inflation report, a slew of other important domestic economic data will be eyed by investors for further direction.

Euro – European Markets

The common currency is trading largely higher against the majors this morning, despite manufacturing and services PMI reports painting a mixed picture of the currency bloc’s economic recovery. While the German manufacturing PMI soared to a thirty-month high for December, services PMI declined unexpectedly, adding to the mixed bag of economic data of late. Likewise, the mixed Euro zone PMI numbers and the unexpectedly weak French releases also added to investors’ predicament concerning the potency of the region’s economic recovery. Later today, the Euro zone trade data and a speech by Mario Draghi will grab market attention, ahead of crucial domestic economic reports in the week ahead that will give a clear view about the region’s present and future growth trajectory. Meanwhile, the Euro traded range bound against the greenback on Friday in the midst of a relatively light economic calendar. While the bigger Euro zone economies continue to struggle, Spain surprised markets on the upside on Friday by posting better than expected consumer price inflation numbers, adding to recent positive economic data from the region’s fourth largest economy.

Other Currencies – Highlights

The Yen has nudged higher from five-year lows against the US Dollar this morning after data released earlier in the day indicated buoyant sentiment among major manufacturers in Japan. The domestic Tankan manufacturing survey showed that large manufacturers in Japan are most upbeat about business conditions since December 2007, supporting the battered Yen against the majors. The combination of relatively weak domestic economic reports and rising expectations that the Fed will scale back its stimulus measures in its meeting later this week has weakened the Yen against the greenback over the past week. With no domestic economic data on tap, the Yen will take direction from news flows emanating from both sides of the Atlantic during the session ahead. Moving forward, apart from the Fed meeting, the BoJ policy meeting later this week will be closely followed by investors for hints on the central bank’s policy stance, amid talks of next year’s planned sales tax hike weighing on the nation’s recovery prospects.