Talking Points

  • Japanese Yen: Test 95.00
  • Pound: Retail Sales Unexpectedly Rises
  • Euro: PMI Falls To record Low
  • US Dollar: Consumer Prices On Tap

Euro Finds Resistance After Citigroup Bailout Inspired Rally, Will U.S. Nationalize Banks?

The Euro shot higher to test resistance at 1.3000 on the news that the U.S. government was increasing its stake in Citigroup. The Euro/dollar has fallen back toward the 20-day SMA at 1.2868 before finding support. A relatively empty economic docket will leave the U.S. intentions for the banking system as the focus for markets today. The final reading for Italian consumer prices was the only indicator to cross the wires. The headline numbers remained unchanged at -0.1% m/m and 1.6% y/y with the EU harmonized reading revised lower to -17.7% m/m and 1.4% y/y.

Inflation data for the region is due out n Friday and is expected to show inflation fell to 1.1% in January which will keep deflation as a possibility as price fall below the central bank's 2% target. President Trichet is forecasted to cut rates by 50bps next week which may limit the upside potential for the single currency. However, as the ECB is one of the few major central banks which is not on the verge of quantitative easing which could add support for the Euro as other countries start printing more money. 1.3000 is a key level to watch the psychological resistance level could prove formidable and another failed test of the price level could lead to increased downside risk for the single currency.

The Pound would also shoot higher on the Citigroup news breaking above resistance at the 50-Day SMA at 1.4574 to reach above 1.4650. Details of the U.K. government's January bank bailout plan are expected to be revealed this week which is also aiding bullish sterling sentiment. There exists trendline resistance at 1.4800 with the February 9th high of 1.4984 is the next barrier to watch. Upcoming U.K. 4Q GDP reading could stall sterling momentum if the growth figures are revised lower from their initial readings as is forecasted. The BoE is expected to lower their benchmark rate at their next policy meeting as the current recession deepens.

The dollar/yen would reach as high as 95.00 as the pair has erased all of its losses from Friday. The Yen has seen its correlation to risk appetite restored over the past few days. However, it could be a product of broader based dollar weakness that was seen on Friday on the nationalization fears and today we could be seeing a retrace of those losses. However, this relationship needs to be watch as it may dictate future trends for the currency.

The dollar was battered overnight as news that the government may increase its stake in Citigroup to as high as 40% sparked risk appetite. The government's clear intentions on its plans for the banking system had sent traders to the sidelines and the dollar benefitted last week from the safe-haven flows. However, the move does increase concerns that President Obama will move closer to nationalizing troubled banks as was hinted by Senator Christopher Dodd on Friday. Indeed, the Senator's comments had sent equity markets into a freefall before White House Press Secretary Robert Gibbs calmed fears when he stated 'This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government.' An empty economic calendar will leave dollar price action at the mercy of the broader themes. If markets continue to view the Citigroup bailout as a positive then we may continue to see dollar weakness, however if nationalization fears grow then we may see a return to risk aversion and the dollar regain its footing.




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