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Forex - Weekly outlook: December 31 - January 4

ForexDec 30, 2012 06:04AM ET
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Investing.com - The U.S. dollar ended Friday’s session slightly higher against most of its major counterparts, as growing uncertainty surrounding talks between U.S. lawmakers to avoid the looming fiscal cliff crisis boosted demand for the safe-haven greenback.

Trading volumes were thin as many investors already closed books to lock in profit before the end of the year, reducing liquidity in the market and increasing the volatility.

Market players remained focused on developments surrounding the fiscal cliff in the U.S., approximately USD600 billion in automatic tax hikes and spending cuts due to come into effect on January 1 unless Democrats and Republicans agree how to cut the deficit.

U.S. President Barack Obama met with congressional leaders at the White House Friday afternoon, but both sides failed to reach an agreement ahead of the looming year-end deadline.

The gathering included House Speaker John Boehner and Senate Minority Leader Mitch McConnell, both Republicans, as well as Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi, both Democrats.

The House of Representatives is due to return to Washington on Sunday. The Senate will be in Sunday as well to try to reach a last-ditch agreement.

Without a deal, the U.S. could fall back into recession and drag much of the world down with it.

On the data front, the National Association of Realtors said Friday that U.S. pending home sales rose 1.7% in November, above expectations for a 1% increase.

A separate report showed that Chicago's purchasing managers' index rose to 51.6 in December, from a reading of 50.4 the previous month, beating expectations for a rise to 51.0.

The euro came under pressure after Italy saw borrowing costs edge higher at an auction of five- and- ten-year government bonds, amid uncertainty ahead of national elections in February.

Rome sold EUR3 billion of 10-year bonds at an average yield of 4.48%, up from 4.45% last month. The country also auctioned EUR2.87 billion of five-year debt at a yield of 3.26%, compared to 3.23% a month earlier.

Adding to jitters, revised data showed that France’s economy grew by a meager 0.1% in the third quarter, down from an initial estimate for growth of 0.2%.

The euro zone’s second largest economy shrank 0.1% in the second quarter, unchanged from the previous estimate.

Meanwhile, the yen held near the lowest level since August 2010 against the greenback as weaker-than-expected economic data fanned speculation the Bank of Japan will introduce further stimulus measures to boost economy activity and combat deflation.

Japan’s industrial output fell by a greater-than-expected 1.7% in November, while consumer prices fell 0.1% in November from a year earlier.

Elsewhere, the pound bounced off an almost three-week low in holiday-thinned trade against the U.S. dollar, as month- and year-end positioning drove flows.

The greenback settled higher against the risk-sensitive Canadian, Australian and New Zealand dollars, as sentiment turned cautious towards risk assets amid uncertainty over the looming U.S. fiscal cliff crisis.

In the week ahead trading volumes are expected to remain light, with many markets closed for the New Year’s holiday.

Meanwhile, China is to release closely-watched data on manufacturing activity, while the U.S. is to publish its monthly jobs report on Friday, as investors attempt to gauge the strength of the world’s two largest economies.

Ahead of the coming week, Investing.com has compiled a list of these and other significant events likely to affect the markets.

Monday, December 31

China is to publish industry data on manufacturing activity, a leading indicator of economic health.

Meanwhile, markets in Japan, Germany, Australia and New Zealand will remain closed for the New Year’s holiday.   

Tuesday, January 1

China is to release official data on manufacturing activity. The state-sponsored report tends to have less impact when it's released after the HSBC PMI because the reports are tightly correlated.

Markets in the U.S., U.K., Europe, Canada, Japan, China, Australia and New Zealand will remain closed in observance of New Year’s Day.

Wednesday, January 2

Markets in Japan and China will remain closed for a bank holiday.

In the euro zone, Spain and Italy are to release official data on manufacturing activity, a leading indicator of economic health. In addition, Germany is to produce preliminary data on consumer price inflation.

Meanwhile, the U.K. is also to release data on manufacturing activity, a leading indicator of economic health.

Later in the day, the Institute of Supply Management is to produce a report on manufacturing growth in the U.S.

Thursday, January 3

Markets in Japan and China will remain closed for a bank holiday.

Meanwhile, official data is to be produced on German unemployment change. Separately, Spain is to publish a similar report.

Elsewhere in Europe, Switzerland is to publish its KOF economic barometer, designed to predict the future direction of the economy, as well as a report on manufacturing activity.

The U.K. is to produce data on construction sector activity, a leading indicator of economic health. The country is also to release industry data on house prices.

Later Thursday, the U.S. is to release a report on ADP nonfarm payrolls, as well as its weekly government report on initial jobless claims.

In addition, the Federal Reserve is to publish the minutes of its most recent policy-setting meeting.

Friday, January 4

The euro zone is to publish preliminary data on consumer price inflation, which accounts for the majority of overall inflation, as well as data on service sector activity.

In addition, Germany is to produce government data on retail sales, a leading indicator of economic health, while Italy and Spain will also release data on service sector growth.

Meanwhile, the U.K. is to publish data on service sector activity, a leading indicator of economic health, as well as a report on net lending to individuals.

Later in the day, Canada is to release official data on employment change and the unemployment rate, leading indicators of economic health.

The U.S. is to round up the week with official data on nonfarm payrolls, the foremost gauge of job creation, as well as data on the overall unemployment rate. The country is also to release official data on factory orders, crude oil stockpiles and natural gas inventories.

In addition, the ISM is to produce a report on service sector activity.

Forex - Weekly outlook: December 31 - January 4

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