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Contributors Forex: Euro May Fall on Soft PMIs, Yen Gains on Pre-FOMC Jitters

Talking Points:

  • Euro May Fall if a Disappointing PMI Data Set Drives ECB Stimulus
  • Yen Rallies, Aussie Falls as Pre-FOMC Jitters Trigger Risk Aversion
  • Fundamental Support for “Tapering” Fed QE Appears to be in Place

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The preliminary set of December’s Eurozone PMI figures headlines the economic calendar in European hours. The region-wide composite gauge is expected to edge slightly higher to 51.9 compared with 51.7 in the prior month. Euro-area economic news flow has underperformed relative to consensus forecasts over recent weeks (according to data from Citigroup), opening the door for downside surprises. Such an outcome is likely to weigh on the Euro as traders build out expectations for an expansion of ECB stimulus in 2014. We are holding short EUR/USD.

The safe-haven Japanese Yen outperformed while the sentiment-sensitive Australian Dollar came under heavy selling pressure as risk aversion swept financial markets overnight. The MSCI Asia Pacific regional benchmark stock index fell 0.6 percent in a move likely linked to jitters ahead of this week’s FOMC monetary policy announcement as traders ponder the possibility of a move to “taper” QE asset purchases. A disappointing Chinese Manufacturing PMI print from HSBC helped amplify the sour mood. S&P 500 futures are pointing firmly lower ahead of the opening bell in Europe, hinting at more of the same ahead.

The foundation for scaling down the Fed’s stimulus appears to be in place. Fiscal drag fears – already on the decline since end of the government shutdown in mid-October – appear to have all but faded after Congress secured a two-year budget deal last week. Meanwhile, US economic data has increasingly outperformed relative to market forecasts since the beginning of November. Finally, near-term inflation expectations have started to perk up, with the 1-year breakeven rate (a measure of the price growth outlook priced into bond yields) surging in late November to the highest level since mid-April.

Asia Session:

1712a

Euro Session:

1712b

Critical Levels:

1712c

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