Key Points
• USD remains generally solid, but EUR-USD stays above next support at 1.1800.
• USD-JPY could extend a little further today – 117.70 is key.
• Japanese data continues to point to strong economic activity.
• NZD hit again as GDP data reveals underlying ills of NZ economy.
• UK Q3 GDP & current account, US core PCE prices due today.

Market Outlook
EUR-USD has moved off the lows seen yesterday, but only modestly and further weakness could be seen following yesterday’s break below the 50-day moving average at 1.1873. The key barrier today and it is a potentially significant one, comes in at 1.1800, which is where it stopped yesterday and also the 61.8% retracement of the Nov to Dec upmove from 1.1642 to 1.2060.

The USD has remained firm against the JPY and this could also extend higher today if 117.70 breaks, leaving risk to 118.20 ahead of the 119.50-120.00 area. The JPY continues to show immunity to solid economic data, simply because such developments are not translating into higher interest rate expectations. These remain grounded due to the lack of strength in core CPI. The charts below show continuing strength in both exports and the activity indices.

After recent weak inflation data and yesterday’s MPC minutes the UK policy debate has become more fluid and the market will be more sensitive to data news. Yesterday’s minutes have increased the risk of a February rate cut, but for this to happen there will need to be some fairly solid evidence (in company trading statements and anecdotal reports) about weakness in consumer spending over the Christmas and New Year period. Otherwise, many MPC members may prefer to wait until the official January retail sales data on February 16. This was something the minutes noted yesterday - that it could be some time before they had a full picture of spending over this crucial period. EUR-GBP continues to struggle to get out of the 0.6750- 0.6825 range. A move higher is favoured eventually (some time in Q1), but any short-term strength may require anecdotal evidence of retail weakness in the weeks ahead.

The NZD continues to suffer, with the latest piece of bad news coming in the form of weaker than expected Q3 GDP data. The data is ‘old’ but highlights the unevenness of NZ growth, with strong household consumption being offset by very weak net exports. There is a real danger of NZD confidence imploding if support at 0.6685 gives way. Below there would open significant downside risk. Above 0.6800-40 is required to offer some short-term stabilisation hopes.

Day Ahead
UK – the final estimate of Q3 GDP and Q3 current account data are due today and it will take some sizeable revisions to the GDP numbers, including the back-series, to have any further major impact on MPC policy expectations. Current account data can be volatile and the market usually does not respond to it.

US – personal income and expenditure data are due and this will include the latest monthly estimate of core PCE prices. This has been subdued in recent months and has helped to calm some of the inflation fears that had developed earlier in the year. The y/y rate last month eased back to 1.8%, the lowest since March 2004.

 
Diary
Data/event BST Consensus*
DE CPI states (Dec, prel) m/m from today 0.9%
CH Employment (Q3) y/y 08.15 0.2% last
IT Business confidence (Dec) 08.30 90.4
GB GDP (Q3, final) q/q 09.30 0.4%
GB Current account (Q3) 09.30 -?7.0bn
IT Retail sales (Oct) m/m 10.00 0.0%
EU Manu orders (Oct) m/m 10.00 0.7%
US Personal income (Nov) m/m 13.30 0.3%
US PCE (Nov) m/m 13.30 0.4%
US Core PCE price index (Nov) m/m 13.30 0.1% last
US Core PCE price index (Nov) y/y 13.30 1.8% last
US Initial claims (w/e Dec 17) 13.30 325k
US Continuing claims (w/e Dec 10) 13.30 2606k last
BE Business confidence (Dec) 14.00 -3.5
US Lead indicators (Nov) m/m 15.00 0.4%

Latest data Actual Consensus*
NZ GDP (Q3) q/q 0.2% 0.3%
JP Tertiary index (Oct) m/m 1.2% 0.7%
JP All-industry index (Oct) m/m 0.9% 0.5%
JP Trade balance (Nov, sa) ?708bn ?807bn
DE Import prices (Nov) y/y 5.5% 5.2%
* Consensus unless stated