Selling the pound and the euro against the dollar and the yen once proves to be the trade of least resistance as European FX are stirred in the turmoil of deepening UK banking losses and intra-Eurozone structural deficiencies (Spain's credit downgrade and widening bond spreads between Mediterranean nations and the Big 2). Sterling is the biggest loser, dipping to fresh 7-year lows against the dollar at $1.3937, fresh record lows against the yen at 126.70 and 2 week lows against the euro at 93 pence.

The smaller than expected drop in UK Dec CPI to 3.1% y/y from 4.1% in Nov offered temporary respite for the beleaguered pound, but the fact that the decrease was the sharpest in nearly 17 years suggests that further retreat in inflation remains ahead, paving the way for further BoE easing. In addition, with the core CPI tumbling to 1.1% y/y from 2.0%, inflation has become the farthest obstacle in the BoE path to quantitative easing. Sterling's bounce before the London lunch break may be reversed as US traders join the fray in earnest seeking to assault the $1.40 figure anew followed by the $1.3870 low. The $1.3677 low of June 2001 remains a viable target for the week.

Dollar strength emerges by default as not only the bulk of the latest bad news is primarily focused on Europe, but also amid the relative data vacuum prevailing in the US this week. The much-touted relief rally from the turning of the new page in U.S. politics may materialize as the soon-to-be-president Obama could reiterate the tax cut component of his stimulus package in today's Inaugural speech. Addressing the $300 billion in tax cuts in the speech is more likely to be supportive for stocks, but the duration of such a bounce remains doubtful as the trader-oriented characteristic of selling the bounces and buying the dips prevails.

Dollar's strength is reflected in its ability to hold above the 90 yen support when other currencies were being sold off against the Japanese currency. USDJPY will require a breach above 91.60 to keep the profit-takers at bay and bolster the rally back into a more confident flow of risk appetite. 92.35 remains a more challenging obsactle—the 61.8% retracement of the decline from the Jan 6 high as well as the 50-day MA. 89.50 seen continuing to offer support.

Euro struggles despite better than expected ZEW institute economic sentiment survey improving to -31 in Jan from -45.2 in Dec. But the current conditions indicator deteriorated to a worse than expected -77.1 from -64.5. This is the third consecutive month in which an improvement in the economic sentiment index runs counter to that of the current situation index, suggesting that any stabilization reflects investors' outlook based on stimulus packages and monetary easing rather than a reflection of current conditions.

Euro's breach below $1.30 for the first time in 5 weeks runs the risk of calling up $1.27, which is the TL support from the Nov lows and the core of the consolidative range prevailing in November. The lack of any potentially USD-negative news raises the risk of extending the EUR damage down to $1.2480. Upside seen capped at $1.3060.