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Forex: Cautious correction

There is an air of caution in markets as we enter what is the last full trading week of the year. The news that China took a water-based drone from the US over the weekend has added to the air of political tension between the two nations. This was probably not helped by the fact that the US administration demanded it back, President elect trump tweeted that they could keep it. Twitter-based diplomacy has arrived, which makes it ever less likely that Trump will be allowed to retain access to his Twitter account once in office. The yen has gained the most, pulling in some corrective activity back towards the 117 level on USDJPY. Given the moves we’ve seen in recent weeks in the wake of the US election, it could well be that such corrective activity continues through this week. The main scheduled risk events of the year are now all over, so in essence there is very little else to play for and those who have done well from the strong dollar could well choose to lock in some profits before year end. This could make USDJPY vulnerable to more corrective activity over the course of the week.

For today, the calendar is relatively quiet, with German IFO data released at 09:00 GMT (marginal increase anticipated to 110.6), with US (Markit) services and composite PMIs follow on thereafter. We also have RBA meeting minutes following on overnight. Stocks are likely to start the week on a slightly more cautious footing, whilst gold is seen forming a base following on from the lows seen on Thursday at 1122.

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