Market Drivers Dec 15, 2015

UK CPI above zero first time in 4 months
Nikkei 1.68% Eurostoxx 2.10%
Oil $36/bbl
Gold $1062/oz

Europe and Asia:
GBP UK CPI 1.2% vs. 1.1%
ZEW GE 16 vs. 15

North America:
USD CPI 8:30

USD Empire 8:30

CAD Manufacturing Sales 8:30

Dollar was weaker across the board in lackluster quiet Asian and early European dealing today with EUR/USD especially well bid as the pair tested the key 1.1050 level in late Asian trade.

The eco calendar was relatively bare but euro benefited from slightly better than expected ZEW survey as which rose to 16 from 15 eyed and saw the current situation increase to 55 form 54.2 expected. Clearly the weaker euro and the expansion of credit is boosting confidence in the region, but the head of ZEW institute Clemens Fuest warned that the refugee crisis and the slowdown in emerging markets is exerting downward pressure on business conditions.

Still, the overall sentiment in the Eurozone and in Germany in particular remains upbeat and that is stoking the short covering rally in the pair which has continued to hold bid ever since the ECB presser two weeks ago. The market is essentially convinced that given the current geo-political and economic tensions in the US, the Fed will produce a “one and done” rate hike at tomorrow’s FOMC meeting.

Although the vast majority of market participants expect the Fed to finally move off the zero standard and begin normalizing monetary policy, the expectation is that the Fed will communicate that rates will remain stationary for a considerable period of time. The view is that with the current volatility in the equity markets, Ms. Yellen and company will not want to add to the turbulence with any hawkish talk.

That’s why the euro has been climbing in the face of a possible US Fed rate hike, as traders expect essentially muted monetary policy goals from the FOMC. Indeed if Ms. Yellen follows the script the euro could easily pop through 1.1100 level taking the late shorts out of the trade. There is however a chance that the Fed may want to assert its credibility and if Ms. Yellen suggests that the tightening cycle may indeed commence in earnest, the complacent euro would be caught flat footed much like the shorts were two weeks ago.

For now the 1.1050 level appears to be the key resistance and with only a smattering of second tier news out of the US today the levels may continue hold for rest of North American trade as markets prepare themselves for the last important economic event of the year.

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