The batch of data releases in Tuesday’s trading session was generally positive. Leading the way was a stronger than expected increase in the UK manufacturing purchasing managers index (PMI) for December at 58.3 which coming in at a 16-year high. The data gave a boost to GBP though GBP/USD is unlikely to gain much of a foothold above 1.5600.
In the US, factory orders surprisingly jumped 0.7% in November and whilst the data is second tier it does maintain the run of generally upbeat US data. Meanwhile eurozone inflation came in higher than forecast at 2.2% YoY, above the European Central Bank (ECB) target level for the first time in two years. The outcome is unlikely to trigger a response from the ECB especially given that core inflation remains well behaved. After hitting a post CPI release high of 1.3433 EUR/USD is likely to drift lower in the short term.
Separately the Fed FOMC minutes of the December 14 meeting revealed little to surprise. Of note, FOMC members highlighted that the improvement in economic conditions was insufficient to warrant any change to the asset purchase program. The bottom line for the Fed is that the dual mandate of maximum employment and price stability is still not in reach and therefore they will keep the pedal to the floor in terms of policy stimulus. Although a further round of quantitative easing seems unlikely the Fed is likely to stick it out in terms of the $600 billion in planned asset purchases whilst an actual rate hike is unlikely until well into 2012.
Commodity prices dropped sharply overnight with soft commodities and energy prices in particular leading the declines. Commodity currencies fell as a result, with the AUD also impacted by growing worries about the impact of the Queensland floods. Initial estimates suggest that total damage from the flooding could reach AUD 6 billion and as Queensland represents around 19% of Australian GDP, the impact on growth could be significant. Growth could drop by a sharp -0.8% YoY in Q1 GDP. This is based on the assumptions that 40% of all exports will experience a 30% reduction
Today’s data slate in the US will be crucial to provide the final clues to Friday’s December payrolls report. The ADP jobs report, ISM non-manufacturing survey and Challenger job cuts data are all scheduled for release. The run of positive US data will help the USD to trade on a firm footing over the short term but clearer direction will await the outcome of the December jobs report whilst the beginning of the Q4 earnings season next week will also be influential. The exception to USD strength will continue to be Asian currencies where more upside is likely, but I prefer to play this via short EUR/Asian FX than the USD.