Eyes on US data today

European stock markets are poised to open lower in line with declines seen in Asia and the US, as mounting inflation fears pushed investors to sell off Treasuries. MSCI’s broad gauge of Asian equities headed for its steepest single-day drop in more than two weeks, fully erasing Tuesday’s gains. China’s main stock index briefly hit its lowest mark since September, reflecting ongoing worries over potential US tariff hikes. Meanwhile, the S&P 500 fell by over 1% on Tuesday after data showed inflation in the US services sector had risen to its highest level since early 2023.

German factory orders plunge

Factory orders in Germany recorded their biggest monthly decline in three months, highlighting the difficulties facing the industrial sector just weeks ahead of elections that will be a test for Chancellor Olaf Scholz. In November, orders dropped 5.4% from the previous month – far exceeding the 0.2% dip forecast in a Bloomberg survey. According to the statistics office, total demand would have edged up by 0.2% if large-scale orders were excluded.

Since 2022, the manufacturing industry has weighed heavily on the broader economy, with cyclical headwinds gradually giving way to deeper structural challenges such as labor shortages and elevated energy costs. Germany’s economy now appears set to shrink for a second straight year in 2024, and the Bundesbank projects only a mild 0.2% rebound for this year.

EURUSD rally may fade soon

The recent rise in EURUSD seems likely to be temporary, as Europe’s troubles could overshadow any euro lift from revised expectations around European Central Bank (ECB) rate cuts. Traders have scaled back their predictions for the extent of ECB easing, with the overnight index swaps market now expecting rates to dip to about 2% by June rather than in April. Although this shift may provide some short-term support for the euro, any upside driven by interest-rate adjustments alone appears limited.

In December, eurozone inflation saw an uptick—thanks mostly to resilient services activity—but this was largely influenced by fuel price base effects. While persistent inflation might prompt the ECB to slow its rate cuts, Europe’s bleak growth outlook—further dampened by China’s struggles and a prospective trade dispute with the US—casts a shadow on the currency’s prospects. Upcoming US economic releases may also underscore the widening gap between the two regions. The mix of subdued growth and stubborn cost pressures raises concerns about stagflation in the eurozone, which would be unfavorable for the common currency.

Political uncertainty within Europe compounds these risks, reinforcing the call for fiscal stimulus, especially in Germany, to prop up a faltering economy. Although the euro has been losing ground against the dollar, it remains comparatively strong versus other major trading partners, limiting its appeal for export competitiveness. A continued decline in the euro’s value may therefore be welcomed by policymakers seeking to boost economic momentum.

US dollar strength paves the way for a difficult year in Asian FX markets

The enduring strength of the US dollar signals a challenging period ahead for Asian currencies. A combination of factors—including China’s economic slowdown, a cautious stance by the Federal Reserve, and rising uncertainty over US trade and fiscal policies—places regional currencies in a precarious position as market volatility grows.

This year’s backdrop is reminiscent of the environment under the previous US administration, but with even higher stakes. China’s economy continues to be hampered by sluggish consumer spending and ongoing strains in the housing sector, while government-driven investment is tapering off. Disappointing stimulus measures add to the bleak picture, and a weakening yuan puts further stress on other Asian currencies.

Meanwhile, US interest rates are significantly higher than during the 2016–2019 Fed tightening cycle, when they rose from 0.5% to a peak of 2.5%—around 200 basis points below today’s upper bound. With inflation still on track to exceed the Fed’s 2% target, policymakers remain wary of easing too soon, adding to the pressure on emerging-market currencies.

Renewed trade tension fears exacerbate the situation, particularly for smaller, open Asian economies. Volatile market responses to President-elect Trump’s tariff remarks highlight the sort of turbulence that could dominate FX markets. In the absence of outside relief, it seems likely that Asian currencies will continue to struggle against a robust US dollar.

US data today

In the US session today, another set of labor market data will be unveiled, potentially influencing the markets significantly based on any surprises in the data. 

The ADP Non-Farm Employment Change is projected to increase by 139K in December, a decrease from 146K in November of the previous year. If accurate, this would mark the lowest reading since August 2024.

Conversely, Jobless Claims are expected to rise slightly to 214K, up from 211K last week. This would represent the first increase after claims reached their lowest point since April of last year.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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