Euro rebounds strongly today after CPI flash estimate beat expectations and accelerated to 2.4% yoy in January, highest level in more than two years. Based on recent inflation rhetoric from ECB Trichet, the stronger than expected inflation reading triggered more speculation that ECB would normalize rates sooner than previously thought. CPI is now above ECB's target of below 2%, close to 2% for the second month in a row and there is no sign of moderation yet. Markets are expecting a possible hike in Q4 but ECB might pull ahead if inflation outlook worsens. Though, after all, EUR/USD's is still kept below 1.3757 recent high on concern of continuation of Egypt protest.

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The turmoil in Egypt escalated, triggering Moody's to cut its government bonds ratings by 1 notch to Ba2, 2 levels below investment grade, with outlook down to 'negative' from 'stable'. The rating agency also downgraded the country's ceiling for foreign currency bonds to Baa3 from Baa2, and the ceiling for foreign currency bank deposits to Ba3 from Ba2. Last Friday, Fitch Ratings also revised the outlook of Egypt's BB+ rating to 'negative' from 'stable'. Uncertainty remains and investors quickly reduce risks. Equities declined across the board. In Asia, the MSCI Asia Pacific Index dropped -0.9%. In Europe, benchmark indices opened lower generally but recovered into afternoon.

width=272Markets have little reaction to data released from US. Personal spending rose less than expected by 0.4% in DEcember while personal income rose 0.7%. Core CPI dropped to 0.7% yoy in December while PCE deflator rose to 1.2% yoy. Canada GDP rose more than expected by 0.4% mom in November. IPPI and RMPI rose 0.7% mom and 4.2% mom in December respectively. Other data released today saw New Zealand building permits dropped sharply by -18.6% mom in December while trade deficit widened to NZD -250m. Japan manufacturing PMI rose to 51.4 in January while industrial production rose 3.1% mom, 4.6% yoy in December. Housing starts also jumped 7.5% yoy.

Looking ahead, RBA rate decision will be a main focus in the coming Asian session. This week is an eventful one in Australia with the RBA meeting on Tuesday and the release of the Statement on Monetary Policy on Friday. We expect policymakers to leave the cash rate unchanged at 4.75% as inflation has stayed in the lower half of the RBA's target band and extensive flooding in Queensland has disrupted the economy. Near-term growth and inflation outlook will be revised lower while those for the medium- to long-term should remain strong. The next rate hike will most likely happen in 2Q11. More inRBA To Leave Rates Unchanged, Monitoring Impacts From Floods.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3547; (P) 1.3646 (R1) 1.3710; More.

EUR/USD drew strong support from 4 hours 55 EMA and rebounds today but upside is still limited below 1.3757 resistance. Intraday bias is neutral and some more consolidations could still be seen. Below 1.3570 will bring another fall but after all, we'd expect strong support above 1.3245 and bring rally resumption. As discussed before, whole decline from 1.4281 should have finished with three waves down to 1.2873 already. Above 1.3757 should bring another rise through 1.4 psychological level to retest 1.4281 key resistance first.

In the bigger picture, main question remains on whether medium term correction from 1.6039 has finished with three waves down to 1.1875. The firm break above 1.35 psychological level again affirm the case that fall from 1.4281 was merely a correction only and whole rise from 1.1875 is still in progress. Also, note that break of 1.4281 will revive the case that medium term correction from 1.6039 was completed with three waves down to 1.1875 and the long term up trend might be resuming. On the downside, though, below 1.2873 will turn focus back to 1.1875 low.

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Economic Indicators Update

GMTCcyEventsActualConsensusPreviousRevised
21:45NZDBuilding Permits M/M Dec-18.60%-1.30%8.80%7.80%
21:45NZDTrade Balance (NZD) Dec-250M50M-186M 
23:15JPYNomura/JMMA Manufacturing PMI Jan51.4--48.3 
23:50JPYIndustrial Production M/M Dec P3.10%2.80%1.00% 
23:50JPYIndustrial Production Y/Y Dec P4.60%4.40%5.80% 
05:00JPYHousing Starts Y/Y Dec7.50%4.60%6.80% 
10:00EUREurozone CPI Estimate Y/Y Jan2.40%2.30%2.20% 
13:30CADGDP M/M Nov0.40%0.30%0.20% 
13:30CADIndustrial Product Price M/M Dec0.70%0.60%0.50%0.60%
13:30CADRaw Materials Price Index M/M Dec4.20%3.20%3.50% 
13:30USDPersonal Spending Dec0.40%0.50%0.40%0.30%
13:30USDPersonal Income Dec0.70%0.40%0.30%0.40%
13:30USDPCE Deflator Y/Y Dec1.20%1.30%1.00%1.10%
13:30USDPCE Core M/M Dec0.00%0.10%0.10% 
13:30USDPCE Core Y/Y Dec0.70%0.80%0.80% 
14:45USDChicago PMI Jan 6568.6

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