Euro Area PMIs to Set the Tone

Impact on GBP: Sterling Enters Pivotal Week Wounded

Sterling limps into an action-packed week, which will bear the final data prints of 2024 and a Bank of England interest rate decision.

This data follows Friday's selloff in GBP exchange rates that came in the wake of a below-consensus UK GDP growth report that showed the economy was at risk of flatlining into year-end, weighed by the new government's negative messaging and tax raid.

Economic surprises drive currency markets, and the UK has gone from outperforming expectations in the first half of the year to underperforming as business and consumer confidence take a dive.

The selloff sees the Pound to Euro exchange rate retreat from last week's 2024 high at €1.2156 to €1.2028. The Pound to Dollar exchange rate looks to be in the next leg lower of the multi-week downtrend, having retreated to $1.2623.

For the Pound to stabilise, this week's data must beat expectations, and the Bank of England must keep interest rates unchanged and signal it is content to follow a quarterly pace of rate cuts.

"GBP/USD has extended its decline from $1.2800 towards $1.2600, whilst GBP/EUR is pulling back after closing at its strongest level in eight years against the Euro earlier last week. 

Major Data: UK PMI 09:30

Impact on EUR: Enough Bad News in the PMIs Already?

The highlight of today's session will be the release of the French (09:15am CET), German (09:30am) and Eurozone (10:00am) December flash PMIs. November readings were not quite as bad as feared, although all three composite readings remain in contractionary territory.

Partly responsible for that pessimism is local politics, where today sees German Chancellor Olaf Scholz's government facing a no-confidence vote. This should lead to early elections in February. Already, both major political parties – the Social Democratic Party (SPD) and the Christian Democratic Union (CDU) – seem to moving towards some kind of fiscal stimulus. This could prove an upside risk for the Euro in the second half of 2025. However, before then EUR/USD will have to deal with US fiscal stimulus and a potential trade war.

Also, today's markets have a variety of European Central Bank speakers. Of these to highlight are ECB President Christine Lagarde (09:30am CET), Pierre Wunsch (1:00pm) and Isabel Schnabel (5:30pm). The latter two come more from the hawkish side and there could be upside risks to EUR/USD if they push back against expectations for sub-neutral monetary policy rates. Additionally, the Hawks seem to have a new script in arguing that it is not the ECB's job alone to restore growth.

EUR/USD is hovering not far from €1.0500 and faces some downside risk today from the PMI numbers. Expect it to trade well within a €1.0450-€1.0550 range today.

Major Data: ECB Speakers 08:30, 09:00 

Impact on USD: Dollar Holds Gains

It's Fed week, and the central bank is expected to cut its target policy band by 25bp to 4.25-4.50% on Wednesday. New Fed forecasts should also reduce the number of expected rate cuts in 2025 to three from four. This is all currently priced by the market, but there seems little reason for the Fed to dovish surprise this week and we see the Dollar staying supported.

Additionally, tomorrow's release of November retail sales is expected to show healthy 0.4% month-on-month growth in the retail sales control group – suggesting US consumer habits are alive and well.

But as seen in previous weeks, the Dollar could also get dragged around by events overseas, where pressure looks likely to stay on the Chinese Renminbi, and traders should expect more rate cuts in Europe and elsewhere.

DXY should again find support near 106.50/70 and should push back above 107.00 should Eurozone PMIs disappoint today.

Major Data: US PMI 14:45

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