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The morning London session saw a battle royale between the pound, the euro, and the Swissy. There can be only one champion, however. And in the end, it was the pound that came out on top.

  • French final HICP m/m: unchanged at 0.4% as expected
  • French final HICP y/y: 1.2% vs. no change from 1.3% expected
  • Chinese new yuan loans: 584B vs. 997B expected, 1,120B previous
  • Italian industrial production m/m: 0.0% vs. 0.6% expected, 0.6% previous
  • U.S. CPI and retail sales reports coming up; read Forex Gump’s Event Preview

Major Events/Reports

Progress in German coalition talks

Earlier today, German Chancellor Angela Merkel and SPD Leader Martin Schulz announced that they have successfully concluded exploratory talks and had hammered out a deal to move forward to formal coalition negotiations.

And to that end, Merkel and Schulz revealed a blueprint for the next round of talks. Although Merkel did warn that: “The coalition negotiations probably won’t be easier than the exploratory talks.”

Also, it should be noted, however, that the deal to move to coalition negotiations is not yet binding since SPD members still need to vote on it when the party meets on January 21.

That didn’t stop the euro from jumping, though, likely because Schulz comforted the market when he said that there’s a “unanimous” mandate to go forward with coalition talks.

Some risk-taking to end the week

The major European equity indices were broadly in the green during the morning London session, indicating that risk appetite was the name of the game.

And according to market analysts the risk-friendly vibes were fueled by mergers, acquisitions, and other deal-making activity in Europe. Although gains were capped because of the euro’s jump due to progress in German coalition talks.

  • The pan-European FTSEurofirst 300 was up by 0.10% to 1,565.53
  • Germany’s DAX was up by 0.19% to 13,226.50
  • The blue-chip Euro Stoxx 50 was up by 0.21% to 3,604.50

U.S. equity futures were also in positive territory, which is another sign that risk appetite was the dominant sentiment in Europe.

  • S&P 500 futures were up by 0.23% to 2,775.75
  • Nasdaq futures were up by 0.11% to 6,733.75

Major Market Mover(s):

GBP

The pound showed strength from the get-go but initially lost ground to the euro while having a hard time against the Swissy. However, the pound finally gained the upper hand during the later half of the session.

And oddly enough, there were no apparent catalysts for the pound’s overpowering performance. None! Zilch!

Some market analysts think that Greenback weakness was the probable reason for the pound’s strength.  However, I’m not too sure about that since the Aussie was weaker than the Greenback and the Greenback, while a net loser, actually had messy price action during the session.

GBP/USD was up by 95 pips (+0.70%) to 1.3639, GBP/NZD was up by 115 pips (+0.62%) to 1.8803, GBP/AUD was up by 126 pips (+0.74%) to 1.7326

EUR & CHF

The euro started the session by shooting higher when rumors about progress in German coalition talks began to make the rounds.

Follow-through buying was limited after that, but the euro was able to preserve its gains (except against GBP), so it ended as the second best-performing currency of the session.

As for the Swissy, it apparently shrugged off the risk-on vibes and followed the euro higher, claiming third place in the process.

EUR/USD was up by 70 pips (+0.58%) to 1.2132, EUR/AUD was up by 102 pips (+0.67%) to 1.5418, EUR/NZD was up by 82 pips (+0.50%) to 1.6726

USD/CHF was down by 41 pips (-0.43%) to 0.9713, AUD/CHF was down by 39 pips (-0.52%) to 0.7642, NZD/CHF was down by 23 pips (-0.34%) to 0.7046

AUD

The Aussie was the worst-performing currency, not just of the morning London session, but of the day (so far) as well, even though risk-taking prevailed and gold prices moved higher on the back of the Greenback’s overall weakness.

The only other possible reason for the Aussie’s weakness is the ongoing slide in iron ore prices since there wasn’t really anything else.

AUD/USD was down by 8 pips (-0.10%) to 0.7869, AUD/JPY was down by 28 pips (-0.32%) to 87.48, AUD/CAD was down by 26 pips (-0.26%) to 0.9855

Watch Out For:

  • 1:30 pm GMT: Headline (+0.1% expected, +0.4% previous) and core (+0.2% expected, 0.1% previous) readings for U.S. CPI
  • 1:30 pm GMT: Headline (+0.4% expected, +0.8% previous) and core (+0.4% expected, +1.0% previous) readings for U.S. retail sales
  • 3:00 pm GMT: U.S. business inventories (0.4% expected, -0.1% previous)