he targeted drone attack sanctioned by President Trump on Baghdad, which caused the death of Iran’s most powerful military leader General Qasem Soleimani, has made for an eventful start to the year. A further escalation in the conflict has followed, with Iran launching a ballistic missile attack on US troops in Irbil and Al Asad, Iraq, on 8th January.

While Trump warned of ‘major retaliation’ should Iran reciprocate with military action of its own, Iranian Foreign Minister Mohammad Javad Zarif appeared to draw a line under the matter in a recent Twitter post. Trump himself also stated during his highly anticipated speech yesterday that Iran ‘appears to be standing down’.

The reaction in the currency markets to the two attacks has actually been relatively muted. The Japanese yen did initially rally sharply to its strongest position since October, although it has since given up all of its gains with the USD/JPY cross now actually trading higher year-to-date. It’s clear that if a significant escalation in the conflict or all-out war between the two countries was realistically in the offing we would have seen a much weaker USD/JPY. The cross is, however, now trading around three-quarters of a percent higher since the beginning to the year.

ADP numbers bodes well for nonfarm payrolls report

The dollar was broadly stronger in trade-weighted terms yesterday, largely due to the sharp unwinding in USD/JPY safe-haven flows following Donald Trump’s speech.

Investors will now have one eye on tomorrow’s nonfarm payrolls report for December. If yesterday’s ADP employment change number is anything to go by, then we could be set for a sizable upside surprise in Friday’s job creation number. According to yesterday’s report, the US economy created 202,000 net jobs in the private sector last month, well above the 160k that investors had priced in. It is worth noting, however, that we have seen a bit of divergence between the ADP number and nonfarm payrolls figure of late, so a strong number tomorrow is far from guaranteed

In the meantime, a number of speeches from Federal Reserve members Clarida, Kashkari and Williams have the potential to shift the greenback this afternoon.

German industrial production beats expectations

We had some more signs that the Euro Area economy is beginning to stabilise from its slowdown this morning, with the latest German industrial production numbers surprising to the upside. Production in the industrial sector expanded by 1.1% month-on-month in November, its largest jump since early-2018. The common currency did, however, receive little support from the release and continues to trade just above the 1.11 mark versus the dollar, around one percent lower for the year.

Next up for the euro will be a speech from ECB member Lane this afternoon.

Brexit debate rages on, sterling unflustered

Sterling has spent much of the past 48 hours or so remarkably rangebound by recent standards, continuing to hobble along around the 1.31 level.

With investors almost fully pricing in an orderly Brexit by the end of the month, the ongoing debates on the Withdrawal Agreement Bill in the House of Commons are not necessarily getting the attention that they once did. There has also been a lack of economic data out of the UK in the past couple of days. The soon to be outgoing governor of the Bank of England Mark Carney will, however, be speaking this morning. We don’t necessarily expect any new information on the BoE’s policy stance, although investors will no doubt remain on their toes.