Trends in risk appetite tended to dominate Asian markets on Monday. There was a weaker than expected reading for the Chinese PMI services index which maintained unease surrounding the wider outlook, especially with further concerns over the financial sector as fresh regulations were announeced for the shadow-banking sector.
The Nikkei index fell by over 2% which also tended to provide some yen support as short positions were reduced and USD/JPY retreated towards 104.20. There was again solid dollar buying support on dips given an underlying lack of confidence in Japan’s fundamentals.
Sterling remained under pressure in early Europe on Monday as GBP/USD tested support in the 1.6350 area. There was speculation that the Bank of England would adjust its forward guidance unemployment threshold at this week’s meeting to make an early monetary tightening less likely.
The UK PMI services-sector index was weaker than expected with a second successive monthly decline to 58.8 from 60.0 previously. Traders were confronted by a half-full or half-empty dilemma as, although there was a monthly decline, the fourth-quarter PMI outcome as a whole was the highest on record. In this context, after initially testing support below 1.6350, GBP/USD was able to regain losses ahead of the New York open with EUR/GBP dipping back below 0.83 as optimism tended to prevail.
The dollar initially maintained a firm tone as it looked to take advantage of generally constructive and optimistic comments from Fed Chairman Bernanke. EUR/USD tested support levels below 1.3580, but there was no test of the important 1.3550 area.
Although the Euro-zone PMI services-index as a whole was unchanged from the flash reading, divergence within individual countries was again an important theme. There was further contraction in France and Italy, while Spain registered a sharp improvement to the highest level for over five years. EUR/USD moved back above the 1.36 level ahead of the US open with some consolidation following losses over the previous two days.
The latest US ISM non-manufacturing data was weaker than expected with a decline to 53.0 for December from 53.9 the previous month. A notably downbeat orders component was an important negative factor in the data, but the employment index was firm.
EUR/USD moved higher following the US data with an attempt to move back above the 1.3625 former support area which had been broken on Friday. USD/CHF retreated back below 0.9050 and GBP/USD moved above the 1.64 level as the dollar lost ground.