As we had suspected, the risk premium in FX assigned to events in Egypt wore off in yesterday's European session. EURUSD quickly climbed off the 1.3570 base to 1.3750 as traders realized that regional contagion was a remote possibility. The sterling has been on a tear since its dreadful GDP printed with the cable trading up to 1.6135 today. Asian equities are moderately stronger at the time of writing after the S&P 500 finished 0.77% ahead. Crude continues to maintain the Egyptian risk premium built from Jan 28th with Brent having broken above $100 while WTI is holding just below $92. The redirection from Egypt back to economic data was clearly sparked by the European CPI reading that unexpectedly rose to 2.4% y/y. With the ECB meeting on Thursday and Trichet's recently hawkish comments ringing in the market's ears, traders are now anticipating further inflation fighting rhetoric at the ECB's press conference. The widening interest rate expectations between the EU / US has been one of the core reasons why EURUSD has rallied in recent weeks and produced merely shallow corrections. The other rationale for the EUR's sudden reversal of fortune has been the expectation of an impending comprehensive solution to the EU sovereign risk crisis. We suspect that the topic will be discussed at the EU summit on Feb 4th however don't expect an agreement to be reached at this time (more likely in March). The divide between countries is still wide and there is growing distrust whether all members will live up to their debt slashing, budget fighting commitments. Bank of Portugal Board Member Cardoso yesterday expressed his displeasure with austerity measures and forecasting assumptions made in Greece, and believed in the end the rescue program was not working and cannot be sustained. There is still support for the EU to give Greece additional time to pay back its debt to avoid default. Yet overall we are bullish on the EUR and suspect that the eventuality of an agreement will keep the EUR supported. In Australia, the RBA held its policy rate unchanged at 4.75% as was universally expected. The board took a neutral stance and expressed readiness to look through these short term events in reference to the Queensland flooding. The market in our view turned overly dovish on the back of the floods and the comments the reconstruction was unlikely to have a major impact on the medium-term outlook for inflation keeps our view of a summer hike intact. We suspect that the interest rate expectations and yield differentials will keep the AUD well support should risk appetite remain firm. In addition, the RBA stated that China and India's economies have recorded very strong expansions, hinting that they suspect growth spillover into their local economy (hardly dovish). In China, PMI came out at 52.9 vs. expected 53.5 with the modest fall likely due to seasonal factors. With the Chinese New Year starting tomorrow we should see further price pressures creep in and increase the potential of the PBoC tightening. Yesterday, US data beat expectations and markets are looking for a solid ISM manufacturing today as activity has been expanding at a good pace.
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