Dollar is trying to recover in early US session as markets sentiment deteriorates mildly after much worse than expected ISM Non-Manufacturing index which turned back into contractionary region for the first time since August. Euro is mixed after ECB left rates unchanged and laid out the plan for stimulus exit, rising against Sterling and yen but retreats mildly against dollar. Japanese yen, on the hand, weakens further as treasury yield rises.

ECB left rates unchanged at historical low of 1.0% as widely expected. Staff projections for growth for this year was revised up from between -4.4% to -3.8% to between -4.1% and -3.9%. GDP for 2010 was also revised up from between -0.5% and +0.9% to between +1.1% and +1.5%. Inflation projections for 2010 was revised slightly up to between 0.9% and 1.7% but remain below ECB's definition of price stability, i.e. below and close to 2%. In addition, ECB has laid down the steps to unwinding the non-standard measures in monetary policy that were implemented during the financial crisis as not all our liquidity measures are needed to the same extent as in the past. ECB will hold its last six months refinancing operation on March 31 and would link the rate on its 12-month tender this month to rates at shorter-term tenders.

Data from US saw ISM non-manufacturing index unexpectedly dropped from 50.6 to 48.7 in November. Details are not encouraging neither, with employment component came in at 41.6. Jobless claims dropped to one year low of 457k. Q3 non-farm productivity was revised down to 8.1%. Other data released today include UK PMI services which unexpectedly dropped slightly to 56.6 in November. Eurozone PMI services was revised down to 53 in November. Retail sales rose 0.0% mom and dropped -1.9% yoy in October. Q3 GDP was unrevised at 0.4% qoq, -4.1% yoy. Australian retail sales rose 0.3% mom in October versus expectation of 0.4%.

EUR/JPY Mid-Day Outlook

Daily Pivots: (S1) 130.73; (P) 131.35; (R1) 132.07; More.

EUR/JPY's rally extends further to as high as 133.53 so far today and at this point, intraday bias will remain on the upside for 135.68 resistance first. As noted before, fall from 138.47 should have completed with three waves down to 126.88 already and current rally is possibly targeting upper end of the medium term range at 139.21. On the downside, below 131.04 will turn intraday bias neutral and bring retreat. But break of 132.30 minor support is needed to indicate that rebound from 126.88 has completed. Otherwise, further rise would be in favor.

In the bigger picture, the stronger than expected rebound from 126.88 mixes up the outlook again and shifts favor back to the case that EUR/JPY is still in sideway consolidation that started at 139.21, in range of 126.88/139.21. In other words, there is no confirmation that medium term rebound from 112.10 has completed. We'll stay neutral for the moment until a firm break of 126.88 or 139.21.