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Central banks and economic data take centre stage today. The Swiss National Banks monthly policy meeting saw interest rates remain on hold at 0%, but more importantly for FX traders it also kept the EURCHF floor steady at 1.20, defying calls from Swiss exporters to raise it to 1.25.

The Bank may not want to wade in to protect the franc while the Eurozone crisis remains at such a critical level as this limits the chance of its success. The SNB may want a weaker franc, but it also wants to maintain its credibility and so has decided to adopt a wait-and-see approach. However, it did add that it is ready to act at any time to protect the economy and prevent deflation risks from building. The Bank noted that inflation pressures are likely to be weak for some time, and CPI inflation data has remained in negative territory since October. As long as deflation risks remain a near and present danger then increasing the EURCHF floor will be cards for the medium term.

However, the SNB's failure to act today caused a sharp drop in EURCHF, which fell through its 50-day moving average on the news. EURCHF is finding some support at 1.2250, the next major level of note below here is 1.22 - the 200-day sma.

Eurozone economic data was also in focus this morning. The news from this was a touch better than the gloom some had been predicting. Firstly we saw French services sector PMI for December move back into expansion territory this month, then Germany reported stronger readings for both the manufacturing and services sector at 48.1 and 52.7. So it came as no surprise half an hour later when the Eurozone composite PMI for December also beat expectations and rose to 47.9 from 46.5. This is still deep in contraction territory, but is at least moving in the right direction.

However, as banks in the currency bloc embark on a fierce scramble for capital in the next few months this could keep growth subdued. Ernst & Young said that the Eurozone is likely to face a mild recession in the first half of 2012 and predicted a measly rate of growth for next year at just 0.1%. And the worst isn't over for Greece either, which the audit firm believes will have its worst ever recession in 2011. The firm also said that although the Fiscal Compact plans agreed at last week's summit were definitely a step in the right direction, there are still questions about how easy they will be to implement, which is keeping investor levels of uncertainty very high.

So even though there have been some positive surprises in the Eurozone's economic data this week, this isn't enough to weaken the bearish tone to euro-based assets. Stocks have opened slightly higher today, and the euro continues to oscillate around the 1.30 mark, however we think that any strength in the single currency will be used to sell into, and look for further declines in the coming days towards the 1.2860 support zone - the 100% retracement of the 1.4940 high from early May. In the near term 1.2960 is acting as a key support zone.

Elsewhere, Fitch was out downgrading European banks again and the French and Germans announced plans for a summit next month on growth and jobs.  The ECB released its Monthly Report today, which pretty much stuck to Draghi's line from last week: the economic outlook is weak, risk to inflation is on the downside but the Bank will not act as lender of last resort to governments.

As politicians jostle in the background about how best to solve this crisis Europe's governments still need to sell debt. Spain sold 5 and 10-yuear bonds this morning with a yield of 4.023% on 5-year debt and 5.545% on 10-year debt. Madrid holds its last auction of the year next Tuesday. Spanish bond yields have declined today and are currently trading around 5.52%. Italian bond yields are also lower. Interestingly, as pressures ease in the bond markets today the euro is still looking weak and has been unable to sustain gains above 1.30.

Eurozone CPI was also released for November and came in line with expectations at 3%. UK retail sales fell more than forecast last month as the economic outlook darkened. Sales fell 0.4% in November, without counting auto fuel sales fell 0.7%, suggesting that consumers aren't getting into the holiday spirit on the High Street. However, the prospect of slow retail sales in the crucial Christmas season could push retailers to make even deeper discounts to try and attract shoppers. This is likely to increase pressure profit margins and we have already seen a wave of bankruptcies in recent weeks, the latest being shoe retailer Barrett's.

The Bank of England announced today that inflation expectations have also fallen. This adds weight to its argument that inflation will fall sharply next year, which adds to the probability of more QE from the Bank of England during Q1. Ahead today there is a raft of US data including PPI, initial jobless claims, industrial production and regional manufacturing surveys.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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