EZ Consumer Confidence (DEC) (10:00 GMT; 05:00 EST)
Expected: -9
Previous: -8

EZ Services Confidence (DEC) (10:00 GMT; 05:00 EST))
Expected:
Previous: 14

What Are The Markets Facing?

On Monday, sentiment figures for the Euro-zone are expected to show dwindling confidence amongst consumers and businesses alike. While this isn’t entirely surprising given the fact that credit market conditions remain tight, financial markets unstable, and as energy prices spike to record highs, the news will not bode well for Euro-zone consumption and growth outlooks in general. Indeed, consumer confidence is forecasted to fall to the lowest in over a year, and with retail sales already a bit weak during the fourth quarter, souring sentiment only suggests that spending will trend lower going forwards. Meanwhile, confidence in the services sector is anticipated to weaken a bit as well, in line with the drop in Euro-zone services PMI, which eased to 53.1 from 54.1 in November. A breakdown of the index shows that near every business component has fallen, including employment, new business, input prices, and outstanding business. Nevertheless, all of these readings were above the critical 50 boom/bust level, signaling expansion. On the other hand, business expectations actually edged slightly higher, which may indicate that the service-oriented businesses remain somewhat optimistic for their prospects in 2008. Nevertheless, the consumer confidence figure will likely carry the most weight with the markets, so traders should keep on eye on the release as the news could shake up the Euro a bit.

Bonds – 10-Year German Bund Futures

While Bunds continue to look bullish, they have run into Fibonacci and trendline resistance at the 114.47 level. However, if equity markets continue to tumble, the gains for Bunds may go undeterred. Monday’s Euro-zone economic data will likely support the contract, as consumer and services sentiment is forecasted to fade, which will raise speculation of a broad economic slowdown in 2008 and an eventual rate cut by the ECB.

FX – EUR/USD

The Euro rally has gone undeterred, as dismal US non-farm payrolls propelled EURUSD through resistance at 1.4770. While the pair will likely remain dominated by US-related news and the prospects for a sharp 50bp rate cut at the end of January, the release of Euro-zone consumer and services sector confidence could weigh on EURUSD – at least for a brief moment. Indeed, another factor behind the Euro’s steep ascent has been the staunchly hawkish bias of European Central Bank President Jean-Clause Trichet, as hot CPI figures have left him little choice but to issue strong rhetoric on price stability. As a result, disappointing Euro-zone sentiment reports could lead to a mild sell-off in EURUSD. Nevertheless, as long as price holds above 1.48, the pair may continue to trek towards record highs above 1.50.

Equities – Xetra DAX Index

A daily chart of Germany’s DAX index shows that price formed a double top 8,100, suggesting that more declines are in store. Support looms below at 7,800, but a sharp drop could see the index fall towards the 200 SMA at 7,665. While price action in the index may depend more on the status of risk aversion market-wide, the release of Euro-zone consumer and services sector confidence on Monday, January 7 could have an impact as well. Sentiment is forecasted to sour during the month of December, boding ill for expansion in the region. With the prospects for European and US stock markets already looking dim given the shaky nature of the credit markets, a disappointing confidence figure could weigh on the DAX. On the other hand, surprisingly optimistic sentiment may push the index up towards 7,900.

Terri Belkas is a Currency Strategist at FXCM.