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Eurozone PMI Services rose notably from 49.5 to 51.4, marking a return to expansion territory. However, PMI Manufacturing remained static at 45.2, firmly in contraction. Consequently, PMI Composite edged up from 48.3 to 49.5, signaling ongoing weakness in overall economic momentum.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, noted that the service sector's rebound is a "welcome boost" to the Eurozone economy, while manufacturing continues to face a severe downturn.

Inflationary pressures remain a concern, particularly in the services sector. Input costs have risen for the third consecutive month, largely due to higher wage agreements, with businesses passing these costs onto customers. This persistent inflation challenge informed ECB's cautious decision earlier this month to cut rates by just 25bps.

Germany and France, the Eurozone’s largest economies, add to the uncertainty with ongoing political challenges, delaying necessary reforms to stimulate growth. Despite this, de la Rubia suggested there is potential for "positive surprises" in 2025 if clearer economic policies emerge from future governments.

Full Eurozone PMI flash release here.

Daily Pivots: (S1) 1.0463; (P) 1.0493; (R1) 1.0534; More...

Intraday bias in EUR/USD remains neutral for the moment. Corrective pattern from 1.0330 might extend further. But outlook will stay bearish as long as 55 D EMA (now at 1.0678) holds. On the downside, below 1.0452 will bring retest of 1.0330 low.

In the bigger picture, focus stays on 50% retracement of 0.9534 (2022 low) to 1.1274 at 1.0404. Strong rebound from this level will keep price actions from 1.1273 (2023 high) as a medium term consolidation pattern only. However, sustained break of 1.0404 will raise the chance that whole up trend from 0.9534 has reversed. That would pave the way to 61.8% retracement at 1.0199 first. Firm break there will target 0.9534 low again.

Daily Pivots: (S1) 1.2592; (P) 1.2638; (R1) 1.2668; More...

Intraday bias in GBP/USD remains neutral with focus on 1.2615 minor support. Corrective recovery from 1.2486 might have completed at 1.2810 already. Break of 1.2615 will resume the fall from 1.3433 through 1.2486 to 1.2298 cluster support zone.

In the bigger picture, price actions from 1.3433 medium term are seen as correcting whole up trend from 1.0351 (2022 low). Deeper decline could be seen to 38.2% retracement of 1.0351 to 1.3433 at 1.2256, which is close to 1.2298 structural support. But strong support is expected there to bring rebound to extend the corrective pattern.

Daily Pivots: (S1) 0.8907; (P) 0.8927; (R1) 0.8947; More…

Intraday bias in USD/CHF stays on the upside with focus on 0.8956 resistance. Decisive break there will confirm resumption of whole rally from 0.8374. Next target is 61.8% projection of 0.8374 to 0.8956 from 0.8735 at 0.9095. On the downside, below 0.8866 minor support will delay the bullish case and bring more consolidations first.

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern, with rise from 0.8374 as the third leg. Overall outlook will continue to stay bearish as long as 0.9223 resistance holds. Break of 0.8332 low is in favor at a later stage when the consolidation completes.

Daily Pivots: (S1) 152.80; (P) 153.30; (R1) 154.14; More...

USD/JPY's rebound from 148.64 is in progress and intraday bias stays on the upside for retesting 156.74. Firm break there will resume whole rally from 139.57, and target 61.8% projection of 139.57 to 156.74 from 148.64 at 159.25 next. On the downside, below 151.79 minor support will turn intraday bias neutral first. But risk will stay on the upside as long as 148.64 support holds, in case of retreat.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). The range of medium term consolidation should be set between 38.2% retracement of 102.58 to 161.94 at 139.26 and 161.94. Nevertheless, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 0.6347; (P) 0.6366; (R1) 0.6380; More...

AUD/USD is staying in consolidation above 0.6336 and intraday bias remains neutral. More consolidations would be seen and another recovery cannot be ruled out. But outlook will stay bearish as long as 55 D EMA (now at 0.6540) holds. Below 0.6336 will resume the fall from 0.6941 to 0.6269 support next.

In the bigger picture, price actions from 0.6169 (2022 low) are seen as a medium term consolidation to the down trend from 0.8006. More sideway trading could be seen above 0.6169, but overall outlook will stay bearish as long as 0.6941 resistance holds. Firm break of 0.6169 will resume the down trend to 61.8% projection of 0.8006 to 0.6169 from 0.6941 at 0.5806 next.

Daily Pivots: (S1) 1.4210; (P) 1.4228; (R1) 1.4252; More...

Intraday bias in USD/CAD stays on the upside for the moment. Current rally is part of the larger up trend and should target 1.4391 projection level next. Considering bearish divergence condition in 4H MACD, break of 1.4119 support will indicate short term topping and bring deeper correction.

In the bigger picture, up trend from 1.2005 (2021) is in progress. Next target is 61.8% projection of 1.2401 to 1.3976 from 1.3418 at 1.4391. Medium term outlook will remain bullish as long as 55 W EMA (now at 1.3706) holds, even in case of deep pullback.

The forex market began the week on a subdued note, with mild risk-off sentiment setting the tone. China's latest economic data painted a bleak picture, with retail sales significantly underperforming expectations and fixed asset investment experiencing a deeper decline. While industrial production growth met forecasts, it failed to offset concerns about the broader economic slowdown. The lack of impactful measures from the Chinese government continues to weigh on market confidence. Despite repeated pledges for stronger economic support, tangible actions remain elusive, leaving businesses, consumers, and markets uncertain about the path forward.

In Europe, Euro is under pressure following Moody's downgrade of France's sovereign credit rating from Aa2 to Aa3, now with a stable outlook. The downgrade highlights concerns over France's fiscal trajectory, with Moody's projecting materially weaker public finances over the next three years compared to previous forecasts. This development comes as President Emmanuel Macron appointed centrist François Bayrou as Prime Minister in a bid to stabilize the political climate amid mounting economic challenges. However, Moody’s noted the “very low probability” of substantial fiscal consolidation under the new government, further clouding France’s outlook.

Looking ahead, the focus shifts to three major central bank meetings this week: Fed, BoE and BOJ. Fed’s decision holds the greatest significance as markets seek clarity on the trajectory of rate cuts in 2025 amid persistent inflationary pressures. In addition to central bank meetings, key data releases, including inflation figures, retail sales, and economic sentiment surveys, will be closely watched too.

Technically, GBP/USD's corrective recovery from 1.2486 looks completed at 1.2810 already, after be capped below 55 D EMA. An imminent focus is when GBP/USD would break through 12615 minor support to solidify this bearish case. Then, further fall should be seen through 1.2486 to resume the whole decline from 1.3433 to 1.2298 key structural support next.

Japan's PMI composite rises to 50.8, stubborn inflation caps growth

Japan’s private sector activity showed a modest improvement in December, driven by a stronger services sector, while manufacturing continued to contract.

PMI Manufacturing index declined from 49.5 to 49.0, marking the fourth consecutive month of contraction. In contrast, PMI Services index rose from 50.5 to 51.4, lifting Composite PMI from 50.1 to 50.8, indicating mild overall growth.

Usamah Bhatti, economist at S&P Global Market Intelligence, pointed out the contrasting trends: “Services firms saw the strongest rise in new business in four months, while goods producers faced a sharper decline in orders.” This divergence highlights persistent weakness in manufacturing amid subdued demand and improving momentum in the services sector.

Inflationary pressures persisted, fueled by the Yen’s weakness, which increased the cost of imported materials. Input prices rose at the fastest pace in four months, while selling price inflation hit its highest level since May, as businesses passed on rising costs to consumers. Bhatti noted, “Stubborn inflation held back a stronger expansion of the Japanese private sector in December.”

Australian PMI composite falls to 49.9, bolsters case for early RBA rate cut

Australia's December PMI data pointing to a broad-based slowdown. The Manufacturing index fell from 49.4 to 48.2. Services PMI edged down from 50.5 to 50.3. Meanwhile, Composite PMI dropped from 50.2 to 49.9, slipping into mild contraction territory.

Jingyi Pan, Economics Associate Director at S&P Global Market Intelligence, noted that the data reflects growing strain across sectors, with manufacturing leading the downturn and services beginning to falter.

Forward indicators presented mixed signals. While business confidence reached its highest level in over two-and-a-half years, new business growth slowed, and unfinished work declined further. Employment gauge showed its first contraction since August 2021.

Muted selling price inflation provides room for RBA to consider rate cuts in early 2024. However, rising cost pressures remain a concern.

NZ BNZ services jumps to 49.5, closer to stability

New Zealand’s BusinessNZ Performance of Services Index rose significantly from 46.2 to 49.5 in November, signaling a move closer to stabilization. However, the index remains under the no-change threshold of 50.0 and well below its long-term average of 53.1.

Key subcomponents offered a mixed picture. Activity/sales improved from 44.4 to 48.6, and new orders/business rose to 49.8, nearing expansion territory. Employment showed only a slight uptick, from 46.4 to 46.8, reflecting continued caution among firms. Stocks/inventories and supplier deliveries moved into expansionary territory at 52.2 and 52.5, respectively, signaling some recovery in supply chain dynamics.

Negative sentiment among respondents eased, with the proportion of unfavorable comments dropping to 53.6% from October’s 59.1%. However, the ongoing concerns over the economic climate and the cost of living remain dominant themes, indicating persistent headwinds for the sector.

Fed’s hawkish cut and signals for 2025, as central bank bonanza continues

Another important week lies ahead for global financial markets, with three major central bank meetings, and economic data converging to shape sentiment. Fed, BoE, and BoJ are set to reveal their latest policy decision. At the same time, a slate of inflation, consumption, and survey data will offer fresh insights into growth and price pressures.

FOMC’s decision tops the agenda. Markets are fully braced for a 25bps rate cut, bringing the federal funds target range down to 4.25–4.50%. With futures assigning over 95% odds of such an outcome, any deviation seems highly unlikely. Yet there are two crucial questions concern Fed’s forward guidance.

First, will policymakers hint at a pause in January, given that the economy remains robust and labor market risks have receded, while inflation remains sticky? Market probability for a pause next month stands at over 80%, so any confirmation or denial in the FOMC statement or Chair Jerome Powell’s press conference will resonate strongly.

Second, the pace of policy easing in 2025 is under the microscope. Fed fund futures suggest around 33% chance of just two more 25bps cuts next year, below the Fed’s September median projection of 3.4%. The updated dot plot and new economic projections will be parsed closely for alignment with market assumptions, as investors seek clarity on how lingering inflation and incoming administration’s fiscal and trade policies might influence Fed’s approach.

Meanwhile, BoE and BoJ are also in the spotlight. BoE is widely expected to keep rates unchanged, with the outlook for four measured rate cuts next year still holding. This meeting may offer little fresh guidance, leaving traders to wait for the February monetary policy summary.

In Japan, BoJ looks increasingly leaning toward maintaining the status quo in the past two weeks, given the lack of urgency to tighten further before its January economic forecasts. While officials consider patience to be a virtue, the BoJ’s track record of unexpected moves means a surprise cannot be fully dismissed.

Beyond central banks, economic data will help define the contours of market sentiment. Investors will scrutinize US PCE inflation, CPI reports from the UK, Canada, and Japan, as well as retail sales data from the UK and Canada.

Additionally, PMIs from major economies will be closely watched. In particular, Eurozone PMIs, Germany’s Ifo and ZEW surveys will test whether Europe’s growth slowdown is stabilizing or deepening. In Asia Pacific, New Zealand’s GDP figures and a batch of Chinese indicators will contribute to the evolving narrative on trade and regional demand.

Here are some highlights for the week:

• Monday: New Zealand BNZ services; Australia PMIs; Japan machine orders, PMIs, tertiary industry index; China industrial production , retail sales, fixed asset investment; Swiss PI; Eurozone PMIs; UK PMIs; Canada housing starts; US Empire state manufacturing, PMIs.
• Tuesday: Australia Westpac consumer sentiment UK employment; Swiss SECO economic forecasts; Germany Ifo business climate, ZEW economic sentiment; Eurozone trade balance; Canada CPI; US retail sales, industrial production, business inventories, NAHB housing market index.
• Wednesday: Japan trade balance; UK CPI, PPI; Eurozone CPI core; US building permits and housing starts, current account, FOMC rate decision.
• Thursday: New Zealand GDP, ANZ business confidence; BoJ rate decision; BoE rate decision; US GDP final, jobless claims, Philly Fed survey, existing home sales.
• Friday: New Zealand trade balance; Germany PPI; UK retail sales; Canada retail sales; US personal income and spending, PCE inflation.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.4210; (P) 1.4228; (R1) 1.4252; More...

Intraday bias in USD/CAD stays on the upside for the moment. Current rally is part of the larger up trend and should target 1.4391 projection level next. Considering bearish divergence condition in 4H MACD, break of 1.4119 support will indicate short term topping and bring deeper correction.

In the bigger picture, up trend from 1.2005 (2021) is in progress. Next target is 61.8% projection of 1.2401 to 1.3976 from 1.3418 at 1.4391. Medium term outlook will remain bullish as long as 55 W EMA (now at 1.3706) holds, even in case of deep pullback.

Markets

German and EMU yields on Friday initially only showed minor gains, but finally extended the rebound that gradually developed earlier last week. US yields added 5.4 bps (2-y) to 6.9 bps (10-y). There were no important US data, but markets apparently are pondering whether recent solid US activity data, slightly higher inflation and uncertainty on the inflationary impact of future (fiscal) policy, might cause the Fed to turn more conditional on the pace and timing of additional cuts. The new (most likely upwardly revised) dot plot will be instructive on the MPC policy assessment going forward. German yields continued the ‘technical’ post-ECB rebound, rising about 5 bps across the curve; the very long end slightly outperforming (30-y +3.4bps). First post-meeting comments from ECB policy makers showed the usual divide between ‘hawks’ and ‘doves’. However, for now gradualism is the greatest common denominator. Despite a congruent interest rate move between the US and EMU, EUR/USD tried to leave recent lows, but the move lacked conviction (close 1.0501 from 1.0468). Sterling underperformed both the dollar and the euro after disappointing UK October production data and a negative monthly GDP reading (-0.1% M/M for the second consecutive month).Earlier last week, it looked like EUR/GBP was heading for a test of the key 0.8203 2022 low. On Friday, the pair closed north of 0.83(22). The technical picture remains fragile, but there is some breathing space. Equities in Europe and the US closed little changed.

Asian markets mostly trade in negative territory after China reported weak November retail sales (3% Y/Y vs 5% expected), indicating ongoing weak demand growth despite recent stimulus efforts. US yields decline marginally as does the dollar (DXY 106.85, EUR/USD 1.053). Later today, the focus will be on the EMU preliminary PMI’s. Given ongoing political uncertainty in France and Germany and persistent negative headlines on all kinds of economic topics, it’s probably too early to see any sustained improvement yet (consensus sees 49.5 unchanged composite PMI). Weak data might already cap any further rise in short-term EMU yields. 2.20%/2.25 % might provide resistance for the 2-y swap short-term. The picture at the longer and of the curve is more balanced. For the US, we look out whether the services PMI confirms the decline in the services ISM. There are often discrepancies between the two indicators. For the euro (EUR/USD), the EMU data might be the dominant factor short-term. First ST resistance at 1.063 is far away. After Friday’s poor UK data, sterling might become more sensitive to additional negative news (consensus expects composite PMI at 50.6 from 50.5).

News & Views

Rating agency Moody’s downgraded both France (Aa2 to Aa3, stable outlook) and Slovakia (A2 to A3, stable outlook) after Friday’s market close. The decision to downgrade France reflects the view that the country's public finances will be substantially weakened over the coming years because political fragmentation is more likely to impede meaningful fiscal consolidation. A negative feedback loop between higher deficits, a higher debt load and higher financing costs, against the backdrop of significant annual borrowing needs, could be the unwanted outcome. Moody’s expect the deficit to stand at 6.3% of GDP in 2025, before gradually decreasing to around 5.2% in 2027. Debt-to-GDP would increase from 113.3% in 2024 to around 120% in 2027. The decision to downgrade Slovakia's ratings reflects the country's broad institutional challenges amid political tensions. A comprehensive reform programme on the judiciary and the media will weaken the country's checks and balances, amplifying a deteriorating trend already captured in governance indicators. At the same time, increased political fragmentation challenges policymaking in particular on the fiscal front.

The German CDU’s election manifesto will be formally unveiled tomorrow, but the Financial Times in an article comments on a draft it has seen from the poll-leading Christian Democrats. The want to run amongst others on a platform of tougher immigration – “we must decide ourselves once again who comes to us and who can stay” – and an agenda for hard-workers. Proposals include cuts to income tax for people on low- and middle-incomes, a reduction in social security contributions, a gradual decline in corporate taxation from about 30% now to 25% and abolishing the “Soli” surcharge on income tax that was introduced to pay for German reunification. It’s unclear how they would fund these rebates with the CDU staying committed to the debt brake. “The debts of today are the taxes of tomorrow.”

Japan’s private sector activity showed a modest improvement in December, driven by a stronger services sector, while manufacturing continued to contract.

PMI Manufacturing index declined from 49.5 to 49.0, marking the fourth consecutive month of contraction. In contrast, PMI Services index rose from 50.5 to 51.4, lifting Composite PMI from 50.1 to 50.8, indicating mild overall growth.

Usamah Bhatti, economist at S&P Global Market Intelligence, pointed out the contrasting trends: “Services firms saw the strongest rise in new business in four months, while goods producers faced a sharper decline in orders.” This divergence highlights persistent weakness in manufacturing amid subdued demand and improving momentum in the services sector.

Inflationary pressures persisted, fueled by the Yen’s weakness, which increased the cost of imported materials. Input prices rose at the fastest pace in four months, while selling price inflation hit its highest level since May, as businesses passed on rising costs to consumers. Bhatti noted, “Stubborn inflation held back a stronger expansion of the Japanese private sector in December.”

Full Japan PMI release here.