Post date: 06/01/2020 08:35
An unusually volatile holiday left the dollar mostly lower against world currencies. The news of the killing of the highest-ranking military figure in Iran by a US drone strike focus traders attention in the absence of any macroeconomic or policy news of note. The initial market reaction was, curiously enough, to send the US dollar lower, although the moves were modest in size.
In addition to the headlines from the Middle East, two events will hold markets' attention. Tuesday we get the Flash inflation data out of the Eurozone, where we hope to see a continuation of the upward trend in core inflation. Friday the US payroll report for December comes out. Look for a continuation of the strength seen in November.
The Pound has recovered nearly all of its liquidity-driven sell off against the Euro on the last day of 2019. In the near term, Sterling performance will be determined by both Euro movements against world currencies and headlines regarding the negotiations for a final Brexit deal. If previous negotiations are anything to go by, we are unlikely to receive market-moving news until the self-imposed deadlines are closer.
Most sentiment indicators out of Eurozone continue to grind higher, with the conspicuous exception of German manufacturing. This week's inflation data is key. The core number has been trending up over the past few months, ad is now bumping up against the 1.3% level that has been a ceiling since early 2017. A print above this level would be quite significant and would be supportive for the Euro.
While the rising Middle East tensions have boosted some safe havens like the Japanese Yen and US Treasuries, the US dollar has so far not joined the rally. US Treasuries rallied sharply, shrinking the differential in interest rates between the US and the Eurozone. On the economic front, second-tier data out of the US has been weaker lately, and the payroll report out on Friday takes on additional importance.