Not a creature is stirring

The current weather in London provides the perfect analogy for the markets this week. The Met Office is advising people to stay indoors after London was hit by heavy snow, and that is exactly the same thing investors will be doing with their money this week. 

Expect very light trading conditions, and current themes across the euro, US dollar and Sterling will almost certainly continue into the New Year. Euro-wise, the International Monetary Fund released a staff report on the viability of the economic reforms in Ireland and it was not pretty reading. According to the IMF, the pressures facing the Irish economy are "intense". The market reaction? The euro-dollar chart on Friday looked like a black run at Chamonix.

2011 will not bring any respite for the euro. More countries will be pulled into the market's crosshairs, and that means more euro weakness over the coming weeks and months. We all remember that the Greek story was like observing a slow motion car crash. It seems inevitable that the same drawn-out fate lurks in wait for several more Eurozone nations, and the euro's viability rests on the ability and patience of Germany to keep playing backstop.

Like the euro, Sterling will probably trade at, or very close to current levels with little economic data this week to push it in any particular direction (it could be pulled by developments in the Eurozone, however). Wednesday, 22 December sees the release of the Bank of England’s minutes, with the continued split in voting between Andrew Sentance, Adam Posen and the rest of the crew. It will also be interesting to see their discussion on short-term inflation and how long the bank expects it to return to target.

Rising US bond yields have been the driver of recent moves in cable towards the 1.54 level. Whether you believe that this is due to increased optimism of the US economic recovery or investors finally running scared of American government debt we will have to wait and see, but the QE pumped stock market continues to rise….. We have lots of low key US figures due for release this week, including new home sales and consumer confidence which may or may not lend support for the recovery narrative but as with the euro and Sterling, range trading for the rest of the week is the most likely outcome.