Despite the Christmas break, economic developments skew major currencies

Today's news headlines:

  • ‘Dollar ends strongest year since 2015 on defensive note’. US-China trade deal optimism sees Greenback decline. (Reuters)
  • ‘Brexit “bad or awful” for UK economy in 2019, say economists’. Forecasting for growth seen as impossible given the uncertainty. (Financial Times)
  • ‘Democrats hatch plan to end shutdown and corner Trump’. Protracted government closure can impact the macroeconomic outlook if delayed payments hit consumer confidence. (Financial Times)
  • 'Chinese manufacturing had an even worse December than expected, more data show’. Factory activity falls below the break-even 50.0 mark for the first time in 19 months. (CNBC)

Markets may have been relatively muted over the last week or so owing to the Christmas and New Year holidays, but a small number of significant news statements combined with thinner trading volumes have resulted in some meaningful jumps for major currency pairs. Optimism over US trade talks with China has fuelled risk-on sentiment, eroding the US Dollar’s safe-haven allure, at least for now. Concern over the ongoing US government shut down, plus the Democrats looming majority in the House of Representatives also presents both political and economic risk in the USA, serving up a fresh layer of weakness for the Buck. Finally, renewed speculation that Brexit may be pushed back is lending a little support to Sterling, although it’s worth noting that the upside is emerging off the back of thin trading conditions. As markets normalise in the next few days, reversals could be seen.

The Eurozone Manufacturing Purchasing Managers’ Index (PMI) kicks off the day at 9am GMT, and this reading is forecast to remain static against the preview number reported last month. However, the trend here is notably downwards, so any shortfall could reignite concerns over the Eurozone sliding into recession. With the European Central Bank (ECB) having concluded its asset purchase scheme, any concern that Mario Draghi and his team are attempting to normalise monetary policy too quickly could end up undermining some of the recent gains made by the common currency.

The UK Manufacturing PMI for December is due for release at 9.30am GMT. Market expectations are for a slower rate of growth to be posted, although the print is still forecast to come in well above the break-even 50.0 mark. By all accounts, it’s the political, rather than the economic, agenda that stands to deliver the greater influence for Sterling in the near-term as markets await the return of politicians from the Christmas break and the pivotal vote on the Brexit proposals which will be held during the week commencing January 14th.

The US Manufacturing PMI is also scheduled for publication, with the private Markit reading due at 2.45pm. Again, the number is expected to illustrate contraction in the pace of growth, although remain comfortably above the break-even level. However, this could provide fresh ammunition for US President Donald Trump as he looks to criticise the Federal Reserve’s hawkish stance over monetary policy, and could also deliver a useful distraction ahead of Thursday’s potentially volatile session in Washington. With Democrats set to be exerting a majority in Congress from later this week and Donald Trump needing concessions to re-open the government, the opposition party could be looking at some very early political gains. Failure for the President to dial down the broader political rhetoric could increase talk of impeachment and in turn, serve to undermine the Dollar.

GBP/USD

Cable has drifted a little higher from pre-Christmas lows, helped along by growing risk appetite emerging from the US. However, the Pound remains close to 18-month lows against the Dollar, and the potential for political risk in the UK leaves Sterling exposed on the downside.

EUR/USD

The Euro has posted significant gains over the US Dollar since Christmas, although some heightened levels of volatility have also been in play. Risk is arguably on the downside here in the wake of the ECB’s commitment to tightening monetary policy in tandem with global economic trade woes.

GBP/EUR

Significant volatility has been seen for the Pound against the Euro in recent days. This could take some time to resolve as economic data remains light and some market participants may not return until next week, although Brexit and its accompanying political risk puts Sterling on the back foot.