Risk aversion recedes mildly in early US session even though US stocks followed European markets and opens lower. DOW is back below 8000 level but the fall is so far limited. On the other hand, Euro is supported by rebound in EUR/GBP after the pound was sent lower by falling bank stocks in UK. Economic data from US were poor even though some upside surprise is still in the ISM manufacturing index. Traders seem to be holding their bets ahead of key event risks of the week including RBA rate decision tomorrow, ECB and BoE on Thursday and NFP on Friday.

Personal spending in US dropped more than expected by -1.0% in Dec while Nov's contraction was also revised down from -0.6% to -0.8%. More importantly, this marked the sixth consecutive month of contraction since the reading turned negative last Jul, capping the worst year since 1961. Personal income, on the other hand, dropped for the third straight month by -0.2%, slightly better than expectation of -0.2%. Headline PCE dropped -0.5% mom with yoy rate slowed sharply from 1.4% to 0.6%. Core PCE was flat mom with yoy rate down from 1.9% to 1.7%. ISM Manufacturing index improved unexpectedly to 32.9 to 35.6, but it's obviously still deep in contraction region. Price paid Component rebounded from 18 to 29. Employment component remained unchanged at 29.9 though. Construction spending dropped more than expected by -1.4% in Dec.

Switzerland's manufacturing PMI tumbled to a new record low of 35 in January, following a downward revision to 36.5 a month ago, as the country's industrial activities have declined abruptly since September 2008. In the UK, January manufacturing PMI rose to 35.8 (consensus: 34.5) from 34.9 in December. As the reading remained below 50, it meant contraction in manufacturing sector is still in progress. Final reading of manufacturing PMI in the Eurozone edged up slightly to 34.4(preliminary: 34.5) from 33.9 in December, suggesting signs of stabilization in the sector. However, as components including outputs, order books and exports order books are still in contraction, recession has not yet come to an end. Germany's PMI for manufacturing, on the other hand, dropped to 32 in January, inline with consensus, from 32.7 in the previous month. Australia house price index fell -0.8% qoq in Q4 following a revised decline of -2.4% in Q3. On yearly basis, the reading plunged -3.3% in the fourth quarter after rising 1.6% in the previous quarter. Aussie remains soft on risk aversion.

Next focus will be RBA rate decision in the coming Asian session. Markets generally expected another 100bps cut from RBA to bring the OCR to 3.25%. While inflation pressure is clearly receding as shown in recent Q4 report, the slower than expected drop in CPI and PPI, as well as the house price index dampens the possibility of a larger cut.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2730; (P) 1.2843; (R1) 1.2925; More

EUR/USD recovers mildly today but after all, intraday bias remains on the downside with 1.2902 minor resistance intact. Current fall is still expected to extend further to 1.2329 low (61.8% projection of 1.4360 to 1.2764 from 1.3329 at 1.2343). Though downside might be contained there initially and bring some consolidation first. On the upside, above 1.2902 will turn intraday outlook neutral but recovery should be limited by 1.3329 resistance and bring another fall.

In the bigger picture, a medium term bottom in place at 1.2329. Whether such fall from 1.6038 to 1.2329 is impulsive or corrective in nature is debatable. But after all, with 1.4867 resistance intact, whole decline from 1.6038 is still expected to resume. Also, fall from 1.4719 is tentatively treated as resumption of such medium term down trend. Sustained break of 1.2329 will target 1.1639 medium term support next. Strong rebound from 1.2329 will argue that consolidation from there is still in progress could extend further between 1.2329 and 1.4719 before down trend resumption.