Risk aversion recedes in early US session, supported by solid data from US and dollar and yen are mildly lower. ISM Manufacturing index rose much more than expected to 58.4 in January. Consumer spending rose for the third straight month in December, by 0.2%, but fell short of expectation of 0.3%. Personal income, though, rose more than expected by 0.4%. Headline PCE jumped from 1.5% yoy to 2.1% yoy. Fed's preferred gauge of inflation, core PCE, rose slightly from 1.4% yoy to 1.5% yoy. Construction spending dropped -1.2% mom in DEcember. US President Obama will propose a $4.84T budget today to fight against high unemployment while freezing spending of a wide swath of government programs. The deficit for 2010 would soar to record-breaking $1.56T comparing to last year's $1.41T.
Sterling tumbles sharply earlier today in spite of strong manufacturing data as investors are concerned about the risk of deterioration in UK's fiscal health in Greece's way, as well as political uncertainty in face of election later this year. Just as bond fund giant PIMCO warned last week that if UK government stick to its current plan for cutting the budget deficit, there is an 80% chance that UK will lose its AAA credit rating and Bill Gross advised investors to avoid Gilts. On the other hand, two opinion pools over the weekend showed that a general election due by June was likely to result in a hung parliament without a single party with outright majority. Traders also lighten sterling position ahead of BoE announcement later this week even though majority of the markets expect BoE would opt not to extend the quantitative easing program. UK manufacturing PMI rose to a 15 year high of 56.7 in January but provided little support to the pound.
Euro, on the other hand, was lifted mildly by recovery in stock markets as well as upward revision in Eurozone manufacturing PMI. The manufacturing PMI was revised up from 52 to 52.4 in January, suggesting better pace of expansion. Swiss SVME-PMI improved from 53.7 to 56 in January, above expectation of 55.4.
RBA will take center stage in the coming Asian session. We expect the RBA to increase its policy rate by 25 bps to 4% on February 2, the central bank's first meeting in 2010. This will be the 4th rate hike by the RBA after it had taken the cash rate to 3% in April 2009. Rise in domestic price pressure and surge in housing prices are major forces triggering the RBA to tighten further. More in RBA Preview: Inflation Pressures the RBA to Tighten Further.
EUR/USD Mid-Day Outlook
Daily Pivots: (S1) 1.3821; (P) 1.3903; (R1) 1.3945; More
EUR/USD recovers mildly today and downside momentum continue to diminish with 4 hours MACD cross above signal line. Nevertheless, we'd still slightly favor more downside with 1.3989 minor resistance intact. Current decline is still expected to continue to next key cluster support at 1.3737. However, considering bullish convergence condition in 4 hours MACD, above 1.3989 will argue that a short term bottom is formed and bring stronger rebound towards 1.4194 resistance instead.
In the bigger picture, medium term rise from 1.2456 has completed at 1.5143 on bearish divergence conditions in daily MACD. Focus now turns to 1.3737 cluster support (50% retracement of 1.2329 to 1.5143 at 1.3736). Decisive break there will also confirm the case that three wave consolidation from 1.2329 has finished at 1.5134 too. In other words, whole medium term term fall from 1.6039 should be resuming for a new low below 1.2329. On the upside, however, break of 1.4578 resistance will leave the fall from 1.5143 in three wave corrective structure and mixes up the outlook.