The lower than expected EZ PMI manufacturing reading took some of the steam out of the risk on rally on the first trading day of the year which was fueled earlier by news that US lawmakers passed the Fiscal Cliff deal to avert tax hikes for the vast majority of US citizens and automatic spending cuts for US government. High beta currencies rose to their recent highs in the wake of the announcement that the Fiscal Cliff deal passed the House by 257-157 vote, their rally stalled in early European trade when the final EZ PMI manufacturing figures were released.
EZ PMI Manufacturing printed at 46.1 versus 46.3 eyed with German data dropping to 46.0 from 46.3 while French PMI remained steady at 44.3. Only the Italian PMI readings showed some significant improvement rising to 46.7 from 45.4 originally reported. Overall the manufacturing sector for the EZ region remains in contraction territory but has started a slow climb back towards the 50 boom/bust level after bottoming out in August at 44.6.
Still despite the continuing problems in the EZ economy, investor sentiment remained overwhelmingly positive with equities and risk currencies broadly up on relief that US did not go over the Fiscal Cliff. The US economy is now viewed as the engine of global growth and the fact it was able to avert a major hit to its aggregate demand was viewed positively by the markets with EUR/USD initially rising within a few points of the key 1.3300 level while Aussie approached 1.0500.
The euro however came off its best levels as remained weaker on the crosses as profit taking and concerns over the weak growth pushed the pair back to 1.3265 by mid-morning European trade.