Risk appetite was in evidence in European hours on the back of expectations that the Fed will reiterate its statement that rates will remain low for an extended period and on decent Eurozone PMI data. Stocks pushed higher in Europe and EUR/USD edged away from the 1.4500 level. The AUD has found support in European hours having been knocked overnight by worse than expected Q3 GDP data. Sterling has performed very strongly this morning on the back of a far better than expected UK labour market report.

In contrast to market expectations, UK jobless claims fell by 6.3K in November. While this is only a small number, it follows on from the better than expected labour market report a month ago and adds weight to the hope that the UK labour market may be more resilient to the recession than had been expected. While it is still possible that the unemployment rate will move higher in the months ahead, the current less bad response from the labour market does relieve a little pressure from the terrible UK budget deficit outlook and adds weight to hopes that once the UK economic does return to growth is may recover a little swifter than had been feared. Cable stormed through the USD1.6340 level this morning on the UK data, EUR/GBP dropped down to 0.8910 before stabilising, though PSNCR data may dampen sterling’s enthusiasm later in the week.

Eurozone Dec PMI data registered another expansion in both the manufacturing and the services sectors (both registered 53.1%). Comfort can be taken that the expansion is still in place. However, the pace of the expansion is still slow consistent with projections that the pace of growth in the Eurozone next year is likely to remain lacklustre. Mixed conclusions can be drawn from the ECB’s last 12 mth cash allocation. Unlike the previous two allotments not all cash will be lent at 1.0% and this probably capped demand. The ECB lent EUR96.9 bln today, well below the July amount of EUR 442 bln and more consistent with the EUR75 bln lent in its second allocation. This will likely led the ECB to again claim that the banks have less need of emergency funding. However, like in the US and the UK there is little evidence that credit availability has loosened significantly. Consequently the reigning in of emergency monetary policy measures from the ECB as from the Fed can only strengthen the case for low interest rates for an extended period.

Softer than expected Australian Q3 GDP at +0.2% q/q and comments from RBA deputy governor Battellino that RBA policy is “now back in normal ranges” knocked the AUD lower overnight. Following on from the three consecutive rate hikes this quarter there is a possibility that the RBA will stay on hold in its February meeting. That said, the RBA is likely to hike again well before the Fed gets off the starting blocks. Bargain hunters pushed AUD/USD up from the 0.8960 level this morning; AUD/JPY has edged up from an overnight low of 80.25.

In addition to the FOMC meeting, US CPI, housing starts and current account data are due. Canadian Oct manufacturing sales data will also be released.

Jane Foley