Top Stories

* German Q4 GDP weaker than forecast 1.3% vs. 1.4% suggesting Q1 will be horrid

* Ireland may call in IMF if economy worsens

* HSBC facing additial capital needs of $30 B

* Russia starts pumping gas to Europe but supply remains a problem

* UK's Brown considering a 'bad bank' model

* Oil at $39/bbl last

* Gold at $825/oz as $800 holds for now

Overnight Eco

* NZD Building Consents 4.3%

* AUD Home Loans 1.3%

* JPY Prelim Machine Tool Orders -71.9%

* EUR French CPI -2.0%

* EUR Industrial Production -1.6% vs. -2.1% forecast

Event Risk on Tap

* USD Retail Sales expected at -1.2%

* USD Import Prices expected at -5.4%

* USD Business Inventories expected at -0.5%

* USD Beige Book

Price Action

* USD/JPY loses 9000 after Irish story spurs risk aversion

* AUD/USD back above 6700 but off highs as risk aversion erases rally

* GBP/USD holds 1.4600 on realtive strength

* EUR/USD erases all Asia gains after Ireland story catches market wrong footed

The EURUSD erased almost all of its Asia session gains after a news report that Ireland may call in the IMF if the country's economy worsens hit the wires at the start of European trade. The currency market which was steadily bidding up the EUR/USD pair in a bout of short covering ahead of Thursday's ECB interest rate announcement was caught completely wrong footed and the unit plunged 100 points in 20 minutes on fears that such a move would create unprecedented political stress in the region.

As the global economic climate continues to deteriorate the Eurozone faces greater political risk than the United States as the confederate nature of the 16 nation union does not allow for the type of broad, cohesive policy action enacted by US fiscal and monetary authorities. With each EU member facing their own set of challenges, the possibility that every country may act at cross purposes to the collective good grows stronger each day.

The question then become whether the ECB as the unifying monetary authority in the region will succumb to the growing pressure to ease more aggressively. We continue to doubt that Mr. Trichet and company will make any grand dramatic gestures at Thursday's meeting but do believe that he may signal a much more accommodative policy approach going forward.

The economic situation in the EZ is quickly becoming critical with today's German Q4 GDP data printing worse than expected at 1.3% vs. 1.4% forecast while Industrial Production data showed yet another massive contraction of greater than 7.0% in November. With inflation nonexistent and demand collapsing quickly, it is becoming clearer by the day that ECB will need to be much more responsive in the coming months.

Meanwhile, US Retail Sales may be the one calendar event in the North American session that could prop up the euro in the near term. With US Christmas sales data woeful and with US gasoline prices declining steadily in December the chances of a downside surprise in the report are quite high. However, the retail news –unless it is markedly worse than expected - may prove to be a temporary blip, with most of the currency market well prepared for a weak reading. As the day wears on the focus is likely to shift back to the Eurozone. With EUR/USD now within striking distance of the 1.3000 level temptation will be great to run the stops at that barrier and if Mr. Trichet strikes a more dovish tone at the press conference tomorrow, the EUR/USD could test support at 1.3000 before the end of the week.

Economic Indicators Update