Top Stories

* Asian and European equities drop after Wall Street plunge

* BoE may buy assets as rate cut efects wane - King

* Obama starts presidency with focus on banks, Afgantistan

* Oil lower on new contract at $40/bbl

* Gold bit off but holds $850/oz.

Overnight Eco

* NZD Retail Sales better at 0% vs. -0.9% forecast

* AUD Westpac Consumer Sentiment -2.2% vs. 7.5% last

* EUR German PPI bit hotter at -1.0% vs. -1.1% forecast

* EUR Italian Trade Balance improves to -1.08B vs. -1.75 eyed

* GBP Claimant Count Change 77.8K vs 82K forecast

* GBP MPC Meeting Minutes 8-1-0

* GBP Average Earnings Index lower at 3.1% vs. 3.3%

* GBP Prelim M4 Money Supply 1.7% vs. 0.9%

* GBP Public Sector Net Borrowing 14.9B vs. 10.8B

* GBP Unemployment Rate steady at 6.1%

Event Risk on Tap

* CAD Wholesale Sales

* USD NAHB Housing Market Index expected at 9

Price Action

* USD/JPY remains below 90 as risk aversion persists

* AUD/USD stages mild rebound to 6570 but can't hold the highs

* GBP/USD rallies to 1.4000 on short covering but collapses once more

* EUR/USD runs to 1.3000 on short covering but comes off the session highs

After climbing back to 1.4000 in early Asia session on profit taking by the shorts GBP/USD tumbled for the third night in a row as traders treated the currency as though it was covered in radioactive waste. An article in London Times which basically called for selling every UK asset was the trigger for the latest downdraft, and the overnight economic data did little to bolster the case of pound bulls.

The best that can be said for the latest UK claimant count results was that they were not as bad as expected. The number printed at 77.9 K versus 82K eyed but the figure was nevertheless worse than last month's release of 75K and showed no improvement to UK job losses. Furthermore, average hourly earnings increased at only 3.1% annual rate versus 3.3% forecast suggesting that UK consumers will not only feel the pressure on the employment front but in their paychecks as well,

The BoE notes revealed that the MPC voted 8-1-0 for a 50bp cut with Blanchflower opting out for a 100bp of easing. UK monetary policymakers continue to insist that the fall in sterling will create a natural rebalancing in the UK economy, but so far that argument has proven false as UK Trade deficits continue to climb. In fact, as we noted last night the sharp depreciation in cable could create a nightmare scenario as UK experiences both a contracting economy and elevated price pressures due to a much weaker currency.

Sensing that they may have reached the limits of efficacy with monetary policy, BoE Governor Mervyn King noted last night that the central bank could resort to quantitative easing by buying assets directly. In short, the UK economic situation remains bleak and after the smallest of bounces, cable retreated below the 1.3800 handle in post news reaction. The currency is undoubtedly grossly oversold having lost more than 1000 points this week, but sentiment towards the pound remains relentlessly negative and the pair could test new lows at 1.3500 barrier on sheer momentum alone. For the time being long sterling remains a toxic trade.

In North American session today the economic calendar is barren, but the focus of attention will center on Treasury Secretary designate Tim Geithner's testimony in front of the Senate Finance committee. Mr. Geithner has run into political trouble over the late payment of some taxes leaving his confirmation uncertain. Unless Mr. Geithner puts in a truly woeful performance today we doubt that Congress would sabotage President's Obama's appointment but the risk of such an outcome could put pressure on the greenback with US economic policy appearing to be in disarray. As a result, the EUR/USD could trade back above 1.3000 as natural beneficiary of such turmoil.

Economic Indicators Update