Market Drivers January 2, 2018
Europe and Asia
EUR: EZ PMI Manufacturing 60.6 vs. 60.6
GBP: UK PMI Manufcaturing 56.3 vs. 58.0
North America
CAD: PMI Manufacturing 8:30
The dollar opened the new year with a dud, falling against all of its major trading partners as the weakness seem on the last trading week of last year persisted.
The euro was one the bigger gainers of the night rising to 1.2075 in morning Frankfurt dealing after the final PMI Manufacturing data confirmed strong demand in December printing at 60.6. The market clearly wants to take the pair higher on the assumption the better growth in the region will force the ECB to taper QE sooner rather than later. ECB officials, meanwhile, are wary of the rising euro, fearing that it may reignite deflationary pressures in the region, but with growth at decade level highs, they may have no choice but to tighten policy over the near term horizon and the market is clearly anticipating the move as EUR/USD now trades within striking distance of multi-month highs.
In UK the PMI Manufacturing data missed its mark printing at 56.3 versus 58.0. According to Markit, “The UK manufacturing sector ended 2017 on a positive note. Although December saw rates of expansion in output, new orders and employment slow from November’s highs, growth in all three remained solid and well above long-run trends.”
Cable stalled at the 1.3550 as result of slightly weaker data but could resume its climb towards the 1.3600 if US session flows continue to sell the dollar.
The dollar in the meantime continued to decouple from US rates as the 10-year traded to 2.43% while USD/JPY drifted towards the 112.00 level. The disparity between the rising US rates and sinking buck must be particularly frustrating to the dollar bulls, but the price action suggests that the market simply does not believe the high growth scenario of the Fed. Fed funds futures are still barely pricing in the prospect of only 2 rate hikes this year and until sentiment changes, it’s difficult to see how the buck can climb. In the meantime, the flows continue to test the lower end of the ranges with bears looking to run the 112.00 barrier as the day proceeds.