Euro-zone GDP data for the area as a whole was marginally weaker than expected at 0.3% from 0.4% previously. The data maintained expectations that the ECB would push ahead with further monetary easing at December’s policy meeting. Headline US retail sales data was weaker than expected with a 0.1% monthly increase for October and the underlying data was also short of expectations, although there were upward revisions to historic data which supported underlying sentiment. After briefly spiking lower, the dollar recovered ground quickly with the Euro unable to regain the 1.0800 level. A weaker than expected 0.4% drop in producer prices for October maintained expectations of weak inflationary pressures and latest consumer prices data will be watched closely this week. November University of Michigan consumer confidence data was stronger than expected at 93.1 from 90.0 previously which should underpin expectations of firm seasonal retail spending. There was little overall shift in futures markets with the implied probability of a December move still just below 70%. Cleveland Fed President Mester stated that the US economy was ready for higher interest rates while Boston head Rosengren stated that excesses in commercial property lending could justify a faster pace of rate increases. In choppy trading, the Euro dipped towards 1.0720 before recovering as first reports of the Paris attacks came ahead of the US close. Overall risk conditions are liable to be more fragile which could lead to a closing of Euro-funded carry trades, but there are likely to be further concerns surrounding Euro-zone economic and political risks as terrorism fears intensify. These concerns dominated initially with the Euro sliding below 1.0700 on expectations of further monetary easing before a rebound.
There was a decline in US benchmark 10-year yields to 2.29% following the US data, the lowest point for the week which initially pushed the US currency weaker. The dollar dipped to lows just below 122.50 before finding fresh buying support and rallying back to the 122.70 area late in the European session. Risk conditions dominated late in the New York session and over the weekend as the attacks in Paris resulted in a more risk-off environment which provided net yen support. The latest Japanese GDP data was slightly weaker than expected with a 0.2% contraction for the third quarter which put the economy back into technical recession. There will be further pressure on the Bank of Japan to maintain an expansionary monetary policy, although there will be some relief that the GDP deflator increased to 2.0% from 1.5%. The dollar overall was able to find support above the 122.00 level in Asian trading as regional equity losses were measured.
There was only limited data released with a weaker than expected 0.2% construction decline for September following a revised 3.4% decline the previous month, although the ONS indicated that the data would not trigger any revision to the quarterly GDP data which stifled any negative Sterling impact. Sterling found support beyond 0.7100 against the Euro and rallied back to the 0.7050 level while there was also support following a brief dip below the 1.5200 against the dollar. The latest inflation data will be watched closely on Tuesday, although the immediate policy impact is likely to be limited. There was further speculation that the Bank of England would be forced to take a more dovish stance in light of potentially more aggressive ECB monetary action and a further escalation of global currency wars. There are also underlying concerns surrounding underlying fragile UK fundamentals with any deterioration in risk conditions liable to undermine the currency.
The Euro was able to move above 1.0800 against the dollar on Friday with the franc generally on the defensive and the dollar made a fresh attempt on resistance n the 1.0070 area. Swiss producer prices recorded a slight 0.2% increase for October, although there was still a 6.6% annual decline which will keep the National Bank on high alert over underlying deflation risks. Risk appetite was weaker following the Paris attacks which caused some immediate franc demand at the market open on Sunday with the dollar peaking close to 1.0100.
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