By DailyFX – US Dollar – Dollar bullishness is slightly mounting ahead of tomorrow's non-farm payrolls report on rather positive data seen today. Already… … pricing in one more 25 basis point rate
increase by the Federal Reserve, traders will be looking forward to continued
strength in the U.S. labor force as suggestive of further growth in the New Year.
This would ultimately add to anticipation of further rate increases even after the
incumbent Greenspan leaves office. Today, market participants were privy to several
reports including the Institute for Supply Management index. A gauge of purchasing
in the services industry, the report was higher than economists had anticipated and
rose to a reading of 59.8. The figure follows a previous 58.5 print and is
suggestive that the services industry remains strong, a positive sign as the sector
accounts for 90 percent of overall activity. Additionally, initial jobless claims
dipped to a five year low against expectations, posting 291,000 versus 320,000
expected for the week. Taking into consideration the two reports, traders are
bullishly anticipating the employment report tomorrow and expect a positive report
to further the dollar uptick that was seen in most of last year. However,
expectations past March may be crimped as retailers saw mildly higher seasonal
sales. Posting the lowest seasonal sales figure in five years, retailers struggled
to lure shoppers out with heavy discounts on goods. Although discounts are a
trademark to seasonal shopping, deeper cuts were offered as sales were only boosted
3.2 percent and remain suggestive that consumer spending that has propped up the
economy recently may not last forever.

Euro
Euro data was relatively mixed on the day as a slew of reports were released for the
session. Positive for euro favored traders, the market saw German factory orders
rise above expectations for a decline of 1 percent on the monthly comparison. This
now bolsters the annual figure considerably higher at 13.5 percent for the year.
Additional evidence of strength in manufacturing and exports were seen in regional
PMI data. According to the Purchasing Managers' equivalent in the Euro zone,
service manufacturing activity rose in major countries including Italy, France and
Germany with the overall zone composite gauge rising to 56.4. The two reports are
indicative of one simple fact, that global demand has picked up for Euro made
products and services as a depreciated domestic currency has given more purchasing
power to the region's trade partners. It also lends to further speculation that the
gains should sooner or later trickle in to the economy. However, according to
subsequent reports on the day, this may not be the immediate case. Consumers remain
hesitant in contributing to the potential turnaround as retail sales in Germany, the
zone's largest economy, dipped a whole one percent on the month. Sales were
expected to rise mildly by economists. This now places overall annualized sales in
negative territory and is reflective of the poor confidence figures that followed.
Coupled with low producer price inflation in the region, sentiment continues to
question the much needed 25 basis point rate hike by the European Central Bank and
any further ones after that.

British Pound
Services data in the U.K. followed suit as the region's index of business activity
rose the most in 20 months in December. Powered by the services sector including
information technology and communications, the gauge climbed to a reading of 57.9
from a previous 55.8 print according to the Chartered Institute for Purchasing and
Supply. This bodes well for the region as the sector accounts for three-quarters of
overall activity in the $2 trillion economy after witnessing the slowest pace of
growth since 1992 last year. Coupled with the recent up tick in manufacturing and a
bottom in housing price valuations, the need for a rate cut consideration may be on
its way out as some concerns posted by policy makers look to have been addressed.
Inflationary pressures additionally look to simply be a temporary shock as crude oil
prices have abated and companies and individuals deal with slightly higher
commodities. The only downside factor seems to be the consumer. Individual
spending continues to remain weak according to the most recent CBI distributive
trades survey. As a result, the only panacea seems to be lower rates in order to
spark consumption and lead expansion in the economy. Until consumers feel empowered
to open their purses and wallets, rate cut considerations look to plague the
domestic sterling.

Japanese Yen
No economic news was released today to spur the Japanese yen in either direction,
set aside from annualized vehicle sales data. For the month of December sales
declined 9.7 percent on an annualized basis. As a result of the scant action,
traders are now anticipating next week's full schedule of events. Next week, market
participants will be able to see household spending data along with leading economic
and coincident indexes. Coupled with machine tool orders, traders will be able to
better assess the world's second largest economy as bullish speculation continues to
hope for any signs of inflationary pressures. With spending incrementally higher
and continued strength in exports, reasoning leads to at least some signs of rising
prices. However, with deflation still persistent, policy officials remain steadfast
in their belief of looser monetary policy. This will ultimately lead to further
downside in the yen as the currency pair continues be a carry trade favorite.

By DailyFX