The trading session for the last days of the past year was characterized by multidirectional volatility, which caused the low levels of liquidity in anticipation of the long period of holidays. Investors were solving their problems by adjusting the balance, aligning the positions and against this background the dollar has maintained its advantage against the euro and the yen but suffered a serious fire-sale against the British pound. It should be noted that the fundamental news from the USA sustained the positive sentiment about the economic recovery. Chicago Institute for Supply Management (ISM Chicago) said that the PMI, known as the Chicago business barometer, rose to 60.0 in December against 56.1 in November. This was the third straight monthly increase and the indicator exceeded analysts' forecasts suggesting a more moderate pace of growth up to 55.5. The index of consumer confidence in December also showed growth and the primary applications for unemployment benefits declined sharply from 452 thousand to 432 thousand. The first week of the year was quite rich in sense of the important events and the news on the U.S. economy; there will be presented the indices of business activity in the manufacturing and service sectors of the ISM for December, these two indicators are expected to be observed with growth. Then, the focus will be on publishing the protocols of the FOMC last meeting, where it is likely to hear the hints of an early tightening of the American regulator policy. However, the central theme of the week appears to be the employment situation in the United States in December, the ADP report is predicted as a significant slowdown of the job losses in the private sector in December to -63.0 thousand after thousand -169.0 in November, and in the main official report on the U.S. employment it is expected to see even a better situation - no reduction, i.e. zero losses after -11.0 thousand a month earlier, though, the unemployment rate will remain at the same level - 10.0%. The general background of economic news, at least according to the forecasts, shows good promise to support the “bucks” and there is a reason to observe continuation of the growth of “green”, unless, of course, the expectations of analysts will be proved with the facts.
EUR
The attitude of the investors to the European currency has not changed, concerns about problems in the sector of public finances of some Euro zone countries have left the euro under pressure and the data on the EU economy, released at the end of the year, has not given a reason for optimism. Dynamics of change of money supply in the Euro zone in November was negative and showed a decrease by 0.2% y / y, which has not met expectations of analysts who forecast growth up to 0.4% y / y. This dynamics was a good signal of the fact that the ECB has not achieved the desired results in the increased lending. A proof for this has become the data from the European Central Bank announcing a reduction of bank lending in the Euro zone in November. According to the information released the private sector lending decreased by 0.7% y / y, it has been observed for the third consecutive month and the banks have reduced lending to companies by 1.2%, i.e. the loans are received by 12 billion euros less than expected. These indicators reinforce fears that the Euro zone's economic recovery has a weak investment environment because the alternative source of financing - raising funds for its bond issue – can be undertaken only by the largest companies. However, lending to the households in November increased by 0.5% after decrease by 0.1% in October that seems encouraging in terms of growth of consumer demand. The news on the EU economy, presented this week, is quite extensive and includes significant figures and most of the results projected in the positive dynamics - the December business activity indices (PMI) in manufacturing and services are expected with the improvement in growth, above 50.0, the consumption and production inflation rise and the “sentiment” indices on the economy and consumer mood are observed with a significant reduction in sub-zero results. Finally, it is expected to see growth in retail sales in November. Nevertheless, it seems, the main driver of the investor sentiment on the euro will be the news on the measures taken by governments of the Euro zone countries to stabilize their budgets as well as the information from the U.S. labor market. If the fears in concern with Spain, Portugal, Ireland and Greece will remain at previous levels the attitudes towards a single currency will not change.
GBP
Overbid of the British currency and low trading volumes before the New Year holidays helped the “Bulls” to push the price by pound against the dollar, albeit briefly, above 1.6200. Obviously, the levels of support achieved by the GBP / USD pair were very attractive to profit-taking so that the price rose to the ranges in which trade was conducted in the middle of last month of last year. The last week news on the “island” economy was not much and the most important information dealt with the housing market in Britain, where, according to figures from Hometrack and Nationwide, the house prices continued to rise giving a reason to the assumptions about the recovery in the UK economy as well as to the doubts in concern with the fears about the possible formation of the next “bubble”. However, the market views this process (the growth in the house prices) with a positive position. The first week news of this year on the UK is quite informative, the statistics tells about business activity in the sectors of the UK economy - manufacturing, services and construction. The December PMI indices are expected to increase with production and service rise in the increase area above 50 and at the same time, construction - in the area of decrease. Expected to see growth in the price dynamics, on the housing market again, according to the data from Halifax, and in the December sales prices of the manufacturers. The political component is also topical this week - once again the Bank of England will decide on the rate and volume of assets purchase within the framework of quantitative easing. Changes are not expected but the market's attention will undoubtedly be focused on this news. So far, the negative on the part of the fundamental statistics is not anticipated according to the forecasts, of course, and the pound has a chance to remain in priorities to the dollar. However, the main factor of influence will come from the U.S. news and in this case, expectations of policy tightening in the USA will provoke the loss of the sterling.
JPY
The Japanese yen continued to be the weakest in the foreign exchange market during the last week session of last year. The yield differential between the Japanese and the U.S. state bonds, increasing as the main reserve currency, gave the market a good reason to consider the yen as the most attractive asset to be used as the borrowing currency for carry trade. Expectations of the monetary policy tightening by the FRS just bring to making this decision. As a result, the USD / JPY pair has risen above the very strong levels of resistance and up to three months maximums of 93.00/10. The news on Japan's economy was not much, the data showed the industrial production growth in November and the increase in retail sales in the same month. As a rule, the news on the economy of “Land of the Rising Sun” is not much at the beginning of the month. This week only the data on leading and coincident indicators for November will be shown. The indicators are projected to increase but the news background once again will be left outside the zone of influence on the Japanese currency. The optimistic news from the USA will have the pressure on the yen, incidentally not only this fact but the positive expectations on the labor market in particular and the difference in the interest rates, which has returned the status of the basic funding currency to the Japanese yen.
Analysis prepared by:
Arkady Nagiev
Forex4you analyst
