The ECB cut rates by 0.5% to 2.0% as expected but ECB President Trichet's statement lit the touch paper and sent the fireworks into the air. He said that the next 'important rendezvous' is in March and not February as many thought the next rate cut would come. This sent EUR/USD flying up to 1.3240. It did not stay up here long as large Eastern European selling saw the pair collapse to 1.3025. The Euro's case was not helped by Ireland being put on review by S&P. It ended the day modestly lower as Trichet refused to call 2 % the lower limit for interest rates, leaving the door open to further reductions in coming months. In the longer-term, ECB president indicated that inflation rates may rise again during the second half of 2009, but that it wasn't necessarily relevant to rates as the Euro-zone is likely to experience a severe slowdown as global economic weakness weighs on export demand.
Equities dropped sharply in the US when talk was that Citigroup would be nationalized and Bank of America needed $30 billion in capital. However, the Dow Jones regained all its prior losses after Citigroup denied this and news that Bank Of America could be in line to receive a guarantee of $100 billion or more from the US government.
Dollar and yen pare part of this week's gain following the late rebound in the US stock markets and stabilization in Asian equities. But after all, the reactions are mild. US House unveiled an $825b bill including spending projects and tax cuts while Senate voted to let President-Elect Obama to spend the $350b remaining in the TARP. Bank of America got $20b investment from the US government for absorbing Merrill Lynch's assets. UK Government pledged 200m pounds to help troubled property owners from losing their homes. After all, investors are generally calming down from this week's stock selloff. With a long weekend in US in sight, some consolidations will likely be seen today with dollar and yen continuing to retreat.
In the US, December's CPI is expected to have dropped -0.9% mom, the 9th consecutive month of decline after -1.7% and -1% in November and October respectively. Energy prices would again lead the fall while auto, household and other consumer goods should have plunged significantly. Excluding food and energy, core CPI was probably up 0.1%. On annual basis, overall CPI is anticipated to have dropped -0.2%, the first negative reading since 1955, while core CPI should have eased to 1.9% in December, from 2% in November.