Euro pares some gain after S&P cut Ireland's credit rating one level from A to A- and warned of further downgrade. S&P said the negative outlook reflects the view of uncertainties surrounding the size of Ireland's additional capital needs for its largely state-owned financial sector. US ADP Employment report came in higher than expected at 187k in January but was shadowed by downward revision of December's figure from 297k to 247k. Thus, there is little support to the greenback in early US session.

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Germany seems to be softening its stance on opposition to expanding the size of the the European Financial Stability Facility (EFSF). Reuters reports today that the German government is actively discussing options for expanding the role of the EFSF to alleviate Greece's debt dilemma. That would possibly include an option of letting Greece buying back its own bonds in the markets as a discounted price. Meanwhile, markets are expecting some more affirmations from EU leaders on a long-term solutions to the debt crisis after the summit in Brussels on February 4. Bond-risk premiums for Spain, Portugal, Italy and Belgium all narrowed for a third day. The development sent Euro to as high as 1.3860 against dollar before retreating in early US session.

Sterling received strong boost from PMI construction, which jumped from 49.1 to 53.7 in January. The strong rebound suggests that construction sector would return to growth in Q1 of 2011. Also, the data raised optimism over the economic recovery in UK, right after manufacturing PMI showed a jump to record high yesterday. In additional, BoE Deputy Governor Bean said that rate hike might not dent confidence if it's because the economy is growing quite strongly and the recovery is entrenched. In that case, a rate hike will be a nice rise and unemployment will be coming down. On the other hand, if rise in oil prices persists and inflation is becoming embedded, the rate hike would not be a nice one, but BoE would have to do it.

width=272Swiss Franc weakens mildly today after SNB Vice President Jordan said that for Switzerland's export industry, such a strong franc is a big and barely tolerable burden, and its problem are also showing a negative impact on overall economic growth. Jordan said a significant overshooting of the franc could threaten the existence of basically sound companies.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.6045; (P) 1.6104; (R1) 1.6200; More.

GBP/USD rises further to as high as 1.6229 and at this point, intraday bias remains on the upside for a retest on 1.6298 high first. On the downside, below 1.6125 minor support will turn bias neutral and bring consolidations. But downside should be contained above 1.5750 support and bring another rise.

In the bigger picture, price actions from 1.3503 (2009 low) are treated as consolidation to long term down trend from 2007 high of 2.1161. Rise from 1.4230 is treated as the third leg of such consolidation and with 1.5296 support intact, such rise could still continue for 1.7043 resistance. But after all, strong resistance should be seen between 1.7043 and 50% retracement of 2.1161 to 1.3503 at 1.7332 to limit upside. On the downside, break of 1.4230 support will be the first signal of down trend resumption and will turn focus to 1.3503 low for confirmation.

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Economic Indicators Update

GMTCcyEventsActualConsensusPreviousRevised
23:50JPYMonetary Base Y/Y Jan5.50%7.60%7.00% 
09:30GBPPMI Construction Jan53.749.649.1 
10:00EUREurozone PPI M/M Dec0.80%0.70%0.30% 
10:00EUREurozone PPI Y/Y Dec5.30%5.20%4.50% 
12:30USDChallenger Job Cuts Y/Y Jan-46%---29.00% 
13:15USDADP Employment Change Jan187K150K297K247K
15:30USDCrude Oil Inventories 2.4M4.8M