Talking Points

* Japanese Yen: Testing 93.00
* Pound: Remains Firm Despite Looming Rate Cut
* Euro: Declining Inflation Raises Chances Of Rate Cut
* US Dollar: ADP Employment On Tap

Euro Finds Support On Dollar Weakness, Despite Historic Drop In Producer Prices

The Euro would reach as high as 1.3627 on the back of broad based dollar weakness despite an increase in German unemployment and the biggest drop in producer prices in 27 years. Factory gate prices in the Euro-Zone dropped by 1.9% following a 0.8% fall in November as energy costs fell 5.1%. The monthly drop dragged the annualized rate to 3.3% from 6.3% which was the lowest in thirteen months. Meanwhile, German unemployment rose for the first time since January, 2006 by 18,000. Although the unemployment rate remained unchanged from November's 7.6%, the prior reading was revised higher from 7.5%. The German labor market is catching up with the economy and December's job losses may be the beginning of a downward trend. Europe's largest economy is in a technical recession and with global demand shrinking the export driven nation may be headed for further weakness.

The precipitous drop in producer prices has increased the downside risk to inflation and may necessitate that the ECB reduce their bench mark interest rate in an effort to adhere to their price stability mandate. Deflation concerns are growing globally and the central bank is expected to cut interest rates by 50 bps at their January 15th meeting. Therefore, we may see Euro weakness resume, despite the current retracement. Yet, the 50-Day SMA looms as support at 1.3204 which may limit short term downside risks.

The Pound remains firm despite the prospect of a BoE rate cut, reaching as high as 1.4993. Psychological resistance lies ahead at 1.5000 with the 50-Day SMA at 1.5086 providing additional interference. A break of these levels may lead to another significant move higher. However, we could see pound weakness heading into the rate decision with the potential for sharp moves in either direction depending on the comments from the central bank. If it appears their easing cycle has ended, then more Sterling strength may be expected. Conversely, a signal that a ZIRP is inevitable could lead to Pound weakness.

The Yen and Swiss Franc reversed their recent downward trends as risk aversion has crept back into markets on the back of the FOMC's dour minutes. The dollar/yen would fall below 93.00 during overnight trading before finding support with the dollar/franc testing 1.1000. European equity markets ended a six day rally and U.S. futures are pointing toward a lower open which may add to the current momentum. We may see this sentiment continue throughout the week with the U.S. employment figures expected to be dour. However, an expected BoE rate cut may give traders hope that global leaders will continue to do what is needed to end the current downturn and fuel optimism.

The dollar has steadily weakened since the release of the minutes of the Fed's last policy meeting in which the committee painted a dour outlook for 2009. The central bank significantly revised their growth estimates lower for the year and now sees the economy contracting for the entire period, reversing earlier forecast of a second half rebound. Indeed, the FOMC predicts that employment will continue to weaken until 2010 which will prevent the economy from gaining traction until the end of the year. Today will we get a glimpse into the state of the labor market with Challenger job cuts and ADP employment figures due to cross the wires. November's ADP figures have already been significantly revised lower to a loss of 472,000 from 250,000 which is the most since records began in 2001. A Bloomberg survey of economists are calling for another drop of 493,000 jobs in the private sector for December which would set a fresh record low for the indicator and signal that Friday's NFP may be worse than the -500,000 that is expected. On the heels of the Fed's minutes the dour employment figures could weigh on the dollar for the remainder of the week. However, now that we are seeing similar weakness globally the bearish momentum may be limited.