Renewed Eurozone Tensions

The USD has so far failed to build on the strong momentum seen at the end of last year. Its early days yet however, and given the ongoing tensions in the Eurozone the USD is hardly likely to lose much ground in the weeks ahead. US data continues to impress relative to elsewhere as revealed in the December ISM manufacturing survey data and overnight news that sales at auto makers and retailers were firmer in December. This economic outperformance may however, feed into a tone of improved risk appetite which could play negatively for the USD.

The USD will face a test from the release of the December payrolls data tomorrow, with forecasts currently looking for the gradual improvement in job market conditions to continue. As usual the December ADP private sector jobs released today will be instrumental in finalising the forecasts for payrolls. Overall, the USD will continue to benefit from the travails in the Eurozone, keeping the USD index well supported around 80.00.

EUR/USD has failed to sustain gains above 1.3000 so far this week and has continued to come under pressure on the crosses. While the potential for short covering may limit its losses sentiment continues to be downbeat. Better than forecast December service sector PMI data have helped to allay the worse fears about the Eurozone economy but this will be of little help to the EUR as further deterioration is likely in the months ahead.

Meanwhile yield differentials continue to have some bearing on EUR/USD. The fact that German 2-year yields have dropped further below US 2-year yields therefore ought to spell bad news for the EUR and will likely act as a cap to any rally in the currency. The news flow in the Eurozone will continue to weigh on the EUR too, with speculation that Spain will need an European Union (EU) / International Monetary Fund (IMF) loan intensifying and press reports that Spain will need to increase its provisions for bad property assets by up to EUR 50 billion. Attention today will turn to a EUR 8 billion bond auction in France.


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