Yesterday's stronger data print in the US that saw more encouraging initial jobless claims, helped the dollar pare some of its recent losses, but it looks like it will be a dismal week for the greenback. The dollar index is already down more than 1 per cent this week and is currently trading at 78.60, while EURUSD is looking increasingly comfortable above 1.3500.

The economic data out of the US can't keep pace with that coming out of Germany. This morning news that German business confidence, the IFO index, rose to a record high due to booming exports to Asia and stronger household spending growth, helped the euro sustain gains versus all of the majors. EURGBP is stronger, while EURJPY has also had a sharp move higher. As we mentioned earlier this week, the single currency has also performed well versus the Swiss franc. If we can get a weekly close above the key psychological 1.3000 level, that would be a bullish signal. Likewise, EURAUD has also turned a corner, and looks ripe for further gains. If it can break above 1.3750 then we could see toward 1.3800.

Stellar German growth highlights the sluggish recovery in the US, and it is no surprise that the 2-year yield spread between German and US bonds widened to its highest level since 2009 earlier today. This yield differential is lifting the single currency, and as we have said before it's not that the ECB has to hike rates in the coming months that will drive EURUSD higher, but that it remains closer to hiking rates than the Federal Reserve in the US.

But although there are solid reasons for the single currency to extend its recent run, beware of sharp pull-backs. Today it was announced that Spain plans to take a partial stake in its troubled Caja banks. The Spanish authorities want to force the Cajas to list on the stock market and then it will take an equity position based on the strength of interest from private investors - if there is no interest from the private sector then the government will make up the shortfall. It emphasized that these stakes in its domestic lenders wouldn't affect its fiscal position. The rescue of the Cajas is estimated at between EUR25 and EUR50 billion, which is probably affordable for Madrid without them having to resort to the EU/IMF rescue fund. This hasn't weighed on the euro, suggesting that investors might see it as a step in the right direction toward sorting out the mess in Spain's domestic lending sector. The 17 caja banks must reveal details about their bad loans and property holdings by January 31, which investors should watch out for.

Fears are growing for the UK. It releases GDP data for the fourth quarter next Tuesday and after an extremely weak retail sales report for December the risks are now to the downside. Retail sales fell by 0.8 per cent in the run-up to Christmas, which left the annual growth rate flat (extremely worrying for a nation like the UK that relies on consumption to fuel its economic engine.) Higher prices for food and fuel were blamed for the fall, the lowest retail sales for a December on record. However, disruption caused by the snow could play a part in the decline in sales.

There is a dearth of economic data today, which will keep the markets news-focused. Stocks have opened higher in Europe partly reversing some of yesterday's losses. This suggests that the markets may have got too worried about the effects of anticipated rate hikes from China. However, a hike is expected before the Chinese week-long New Year holiday that start's from the 3 February.

Data watch:


13.30 GMT (0830 ET) CD Retail Sales Last 0.8 Exp 0.4

13.30 GMT (0830 ET) CD Retail Sales Ex Autos Last 0.9 Exp 0.4

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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