- Chinese Yuan remains under pressure
- UK construction PMI figures boosted
- UK PMI figures and Federal Reserve's minutes this evening
Yesterday the Euro continued to slide on the back of weaker than expected inflation data. The single currency flirted with 1.0700 versus the dollar as it was reported the prices in the Eurozone increased by a meagre 0.2% in December core inflation which excludes alcohol and energy prices which rose by only 0.9% versus an expectation 1% rise. The ECB is tasked with keeping inflation close to 2% and will now be under renewed pressure to act. Markets were unimpressed with their efforts in December and if inflation continues to remain below par, expect calls for an increase in quantitative easing while the single currency looks set to continue its current slide.
Overnight the Dollar continued its upward momentum versus most currencies reaching 1.0710 versus the Euro and breaking key support against the Pound. Divergent monetary policy from global central banks was the main driver of currencies in the back end of 2015 and that theme looks set to continue in the early part of the New Year. The FOMC is forecast to raise rates by up to 100bps this year which should keep the dollar supported. US data has been fairly mixed of late so today's ADP report will be very closely watched as a precursor for the all-important Non-Farm payrolls release on Friday. A print of significantly above 200k on Friday should see the dollar continue its ascent. FOMC minutes released this afternoon should provide no real surprises as it should corroborate the idea of 4 further increases in rates before the end of the year.
The early focus will be in the UK with the release of service sector Purchasing Managers Index for December. Markets are expecting another decent figure after last month's print of 55.9 signalling robust growth. The service sector accounts for over 75% of growth on the UK so another healthy reading may encourage traders to at least question whether the Bank of England may begin to reassess the current loose monetary policy stance. With the Pound close to its 4 year lows a corrective rally on improved data would not be a surprise.
FX Research by Ricky Nelson