Eurozone sovereign associated risk remains the dominant theme for forex markets as trading for 2012 gets underway. After falling to a 15-month low of close to $1.29 versus the dollar last week, the euro has regained some composure but remains vulnerable to fresh selling against both the US and GBP. Amid increasing concerns about the outlook for the eurozone economy, leaders in Germany and France announced yesterday plans for a bilateral summit next week, hoping once again to find a comprehensive solution to the region’s debt crisis. Meanwhile, there was some boost to risk sentiment overnight, with Asian stock markets picking up on signs of a improvement in China’s manufacturing last month. China’s PMI rose to 50.3, showing a return to expansionary territory
after dipping below the key 50 level in November. This should bode well for European markets when trading gets underway later this morning. In the spotlight later today will be the US ISM manufacturing index reading for December.

Recent data from the US have been encouraging and markets will be looking for any further evidence that the US economy is holding up reasonably well. Meanwhile, the UK PMI for the last month, as well as the minutes from a recent FOMC meeting, are also likely to attract attention. The key release of the week, however, is likely to be Friday’s non-farm payrolls report, with the trend in the
labour market key in terms of assessing the outlook for US monetary policy. The November report was well received and markets will be looking for any further signs of stabilisation in the US labour market. Thursday’s ADP employment report (which covers private sector jobs only) should provide some advance direction ahead of Friday’s official numbers.