Talking Points
RBA stays at 6%
UK Housing demand remains firm
UK PMI Services stronger than forecast
EZ PMI slightly lower but retail sales firm
US ISM services and ADP on tap
Once again EUR/USD fell through the 1.2700 level in early European trade pushed there by slightly weaker than expected PMI services report. The EZ PMI services which printed at 56.7 versus 57.0 expected was dragged lower by markedly weak Italian PMI readings which slipped to 54.3 from 57.5 forecast. Both the German and French numbers actually rose albeit slightly from the prior months levels. Overall however, the data suggests that EZ economic recovery, although uneven in nature, remains on track leading ECB to maintain its hawkish tone at Thursdays post announcement press conference. Nevertheless, the pair sold off on the news as traders saw little possibility for further upside given the results and chose to book quick profits instead. With 3.25% virtually guaranteed and 3.5% most likely factored in to the market, at present players have few reasons to aggressively bid up EUR/USD.
Yet, in the upcoming weeks strength in the EUR/USD may emerge not from any positive economic data from the Euro-zone but rather from the growing realization that US economic performance is deteriorating. Todays US ISM Services report due 14;00 GMT therefore becomes critical to the dollar bear case. If it follows in the footsteps of Monday s disappointing print from ISM Manufacturing it will be yet another data point to contradict the sunny bounce-from-a-soft-landing scenario of dollar bulls. If however, the ISM data manages to maintain pace, the moderate US growth story remains in tact and may in fact be aided by sharply declining oil prices which could act as a welcome de facto tax cut for the US consumer just in time for the Christmas shopping season. In short the balance of risks remains remarkably even providing the market with very little forward guidance. All of this has resulted in record low volatility in the pair as range bound movements continue to dominate trade.
