Dollar retraces some of this week's gain as US stock held key near term support. Dow dropped to as low as 8376 yesterday but the decline stalled ahead of key near term support of 8367 mentioned in our weekly report. Note that risk aversion remains the dominant driving force in the currency markets in parallel to ECB rate cut speculations. Dollar bulls took some profit on concern of a strong rebound in stocks which reverse the near term strength in dollar and yen. The development of the US stocks today, a strong break of 8367 in DOW or a strong rebound, would decide the near term direction in dollar and yen. In addition, markets will look into retail sales from US today. Spending on discretionary items such as home electronics and apparel should remain weak in Dec. Headline sales is expected to record the 6th consecutive month of slides by -1.2% mom Ex-auto sales is expected to drop by -1.3% mom too.

Also from US, export price index in December is expected to have plunged -2% mom in December while import price index should have fallen much more by -5.3% mom due to sharp decline in oil price and more rapid economic downturn in the US. Fed’s beige book to be released at 1900 GMT should reveal declining economic growth across the broad in December and early January. Although credit condition may have eased after the Fed’s unprecedented reduction of interest rate to 0-0.25% in December, inflationary pressure remained subdue because of decline in commodity prices.

To be released in European session, Eurozone's industrial production is expected to have dropped -1.8% mom in November (October -1.2%) as deteriorating sentiments and temporary closure of factories would have significantly reduced output. Given the relentless stream of downside surprise on economic activities, Germany GDP growth should have slowed to 1.4% yoy in December after rising 2.5% in the previous month.

Technically speaking, dollar index's break of 84.01 confirms that rise from 77.69 is still in progress even though intraday momentum may be diminishing a bit. A drop below 83.38 will bring some consolidation first. Nevertheless, short term outlook will remain bullish as long as 81.19 support holds and the current rally from 77.69 is expected to extend to retest 88.46 high.

Euro recovers mildly against Sterling but after all, short term outlook in EUR/GBP will remain bearish as long as 0.9174 resistance holds. Firm break of the trend line support at 0.8825 will argue that whole rally from 0.7808 has completed and will pave the wave for deeper decline to next key support level at 0.8234. EUR/CHF's break of 1.4754 low yesterday indicates that whole decline from 1.5880 has resumed and should target key long term low of 1.4315. A break above 1.5039 is needed to invalidate the short term bearish view.