The markets will be looking at yield and structural factors over the next few weeks. There will be some speculation over a tighter Fed policy during 2010, but it will still be difficult to secure strong support. The US currency has the potential for some support given fears over structural vulnerabilities within the European economies.
Key events for the forthcoming week
Date
|
Time (GMT)
|
Data release/event
|
Friday January 8th
|
13.30
|
US employment report
|
Thursday January 14th
|
12.45
|
ECB interest rate decision
|
Thursday January 14th
|
13.30
|
US retail sales
|
Dollar:
There will be further expectations of a gradual US economic recovery during the first quarter of 2010. There will also be expectations of a Fed tightening during the first half. The central bank is still likely to take a cautious stance which will limit dollar support and there is also a high risk that the economy will falter again later in the year which will limit dollar support. The dollar should be able to gain some protection from a lack of confidence in the European economies.
The dollar initially strengthened at the start of 2010, but was unable to break any key technical levels and found it difficult to maintain momentum as the economic data did not provide strong support, although there was an advance against the yen.
The latest US PMI manufacturing data was stronger than expected with an increase to 55.9 in December from 53.6 the previous month and this was the highest reading since June 2006. The US currency still managed to secure net gains following the data, although the advance was limited.
The services-sector data was slightly weaker than expected with the increase for December held to 50.1 from 48.7 the previous month. The employment component improved over the month, but remained well below the 50.0 threshold for expansion.
Elsewhere, the US pending home sales data was sharply weaker than expected with a 16% decline for November, primarily due to the fact that sales had been made earlier in anticipation that a tax credit for purchases would cease at the end of November. Sales were still over 15% higher than seen in November 2008. The factory orders data was stronger than expected with a 1.1% monthly increase
The ADP employment data was also slightly weaker than expected with reported private-sector job losses of 84,000 for December after a revised 145,000 decline the previous month. The US jobless claims data was slightly stronger than expected with a figure of 434,000 for the latest week from a revised 433,000 previously
The FOMC minutes did not offer any dollar support with Fed members still very cautious over the economic outlook which will reinforce expectations of a very slow pace of tightening by the Fed, especially as they are still confident that inflation will stay low.
Regional Fed Governor Hoenig did, however, call for interest rates to rise soon which increased speculation over splits within the FOMC during 2010.
Markets have moved to price in a 60% chance probability that the Fed will increase interest rates by June. The dollar will, therefore, find it difficult to gain further strong support on yield grounds unless there is very strong data. |