Monday AM: GBP Eyes CBI Data, EUR: Pressured | USD: NY Empire Manufacturing | AUD: All Eyes on China

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It's a flat, uneventful start to what promises to be a busy week for foreign exchange markets.

Most major currencies are relatively unmoved on Monday, with the U.S. Dollar holding near a 19-month high ahead of an expected U.S. Federal Reserve rate hike this week.

Be aware that liquidity could start to taper off ahead of the Christmas period and therefore currencies could become prone to sizeable swings, particularly towards the end of the week.

GBP

Today sees the release of industrial trends orders from the CBI at 11:00 GMT; this is not a tier-one release but it is nevertheless an important survey in that it gives a timely snapshot into the manufacturing sector's performance.

Markets are looking for a reading of 6 for December, down on November's 10.

Recent PMI surveys suggest the UK's manufacturing sector has held up despite persistent Brexit uncertainty, even though exports are week. We would expect some contagion from the slowdown in EU manufacturing to potentially weigh too.

Brexit remains the prime driver for both Sterling and the UK economy, and analysts will be looking for signs that the chronic uncertainty on the way forward is hurting the economy.

"In the aftermath of May's latest rebuff in Brussels, uncertainty will be heightened and the markets will be fearful of an increasingly damaging effect on the real economy," says Guy Stear, an economist with Société Générale in Paris.

EUR

The final November inflation numbers are out at 10:00 GMT. Because the preliminary numbers have already  been released today's data are not likely to change and therefore unlikely to have a major impact on the Euro.

Headline CPI inflation is forecast to read at 2.0%, month-on-month CPI inflation is forecast to read at -0.2%.

The data comes days after the European Central Bank cut its 2019 inflation forecasts, suggesting to some that the ECB's task of getting inflation sustainably back above 2.0% will remain an ongoing task.

As such, markets are betting that the long-held assumption that the ECB raises interest rates in 2019 might be an optimistic one.

We saw the Euro fall back as markets acknowledged this assumption in the wake of the December ECB meeting, we look for this theme to run into year-end.

This week in the Eurozone, markets are likely to be focused on news regarding the budget bills in France and Italy.

"EUR/USD has eroded its near term uptrend and sold off to the end of November low at 1.1267. This has held on a closing basis and it is possible that the market will bounce from here but It is on the defensive and failure here will trigger losses to the 1.1216 recent low and the 61.8% Fibonacci retracement of the 2017-18 advance at 1.1186," says Karen Jones, a technical strategist with Commerzbank in London.

USD

We will be watching the New York Federal Reserve's Empire Manufacturing Index, due to be released at 13:30 GMT for a sign as to how the country's manufacturing sector is performing in December.

Market consensus is that a reading of 20.10 will be released, down on November's 23.30.

It's a relatively quiet start to what will be a busy week for the U.S. Dollar as we have the Federal Reserve meeting due midweek.

Markets expect the Federal Reserve to hike the funds rate by 25bps to 2.25%-2.50%, but hike IOER by only 20bps.

"More importantly, we think there is a strong likelihood that the dot plot will show only two hikes in 2019 versus three dots in the September dot plot. We also expect the FOMC to alter the language in the statement slightly, but make few changes in the projections of economic variables," says Soc Gen's Stear.

AUD

The Australian Dollar keeps a close eye on China, and this week will be an important one in that it marks the 40th anniversary of China's Reform & Opening policy which allowed for that shift away from strict socialism to the highly successfully 'command capitalism' model we are familiar with today.

The event starts on Tuesday, December 18.

"The current growth  and the celebratory event will provide an opportunity for the leadership to reconfirm its commitment to the policy. Also, the Central Economic Work Conference will take place towards end of the week, where we expect policymakers to reiterate the approach of measured easing," says Soc Gen's Stear.

The need for easing comes as China's economy comes off the boil.

Friday's Chinese industrial production data confirmed that growth is weakening further into year-end and adds to expectations that we will see more easing from China soon.

Industrial production growth dropped from 5.9% y/y to 5.4% y/y, the slowest rate of growth in 10 years, whereas consensus expected the growth rate to remain unchanged. Retail sales growth slipped further from 8.6% y/y to 8.1% y/y, with consensus expecting 8.8% y/y.

The market response will be key: If markets are convinced authorities have a package that will halt the slowdown in Chinese growth, we could see Chinese stocks and the Yuan rally.

In such a scenario we would expect the Australian Dollar to follow suit as a stronger growth outlook for China bodes well for Australian exports and therefore the currency.

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