Today's trading comes across as mostly a denial of facts. Perhaps it is the jubilation that comes with the start of a New Year, or the low volume at the end of a holiday week, but today's numbers certainly cast a concerning picture on an already weakened economy. Price action in the dollar is also equally perplexing, as the currency posts broad gains in today's market. However, we warn that the facts in the marketplace will inevitably catch up with those who are once again convinced that the economy has hit the bottom.

ISM is A Record Breaking Figure

There is no doubt that today's ISM report was a truly record breaking event, unfortunately not in the direction the markets wanted. Included in today's feats is a drop recorded as the most severe in 28 years, a manufacturing slowdown that has reached its lowest level since 1980, new orders are at a record low, and prices fell to levels not seen since 1949. The slowdown in manufacturing has clearly been evidenced by this report; however the spirit of the holidays is unfazed. The rationale is that many expect that once president-elect Barack Obama takes office, he will enact a very sizeable fiscal stimulus package that will be extended toward job creation and the development of infrastructure. It seems that the worse the economy gets, the greater the probability such policies will be implemented, so theoretically many feel relief is within the not too distant future. We have already seen evidence of such possibilities in the continued cash injections into General Motors.

A Big Week Lies Ahead
Trading for the past few days has been spurred on little economic data as we were in the midst's of the holiday season. Now that it is back to business as usual, there will definitely be a multitude of reports that will iron out the true trend of equities and currencies. By Tuesday, we will have the FOMC Meeting Minutes, and then Wednesday we expect the ADP Employment change. However, one of the most important events to start the year will be the Non-Farm Payrolls report. After losing more than a half-million jobs last year, it is possible that we see a surprise bounce in payroll numbers. However, as we have noted previously, it is the usual recessionary trend to see an unexpectedly large fall in jobs followed by a decent rebound. Once the rebound occurs a more incessant period of job losses extends throughout the recessionary period. We have so far embarked on only a third of this pattern.

Unfortunately, the New Year does not hold any relief for struggling European manufacturers. The EZ Purchasing Managers index plummets to a record low since the survey began in 1998, falling to 33.9 from 34.5. The report notes severe dislocations in exports, staffing, and price levels. German and French PMI was similarly weak, while Italian PMI had some surprising strength. The seventh consecutive month of manufacturing contraction makes things difficult for the ECB once again. The decision, which is still two weeks away, will truly test the willingness of the ECB to respond to growth-related concerns. Trichet, for one, has widely expressed his opinion that rate cuts will come to a halt, giving time for the 75bp cut of last meeting to circulate through the economy. Unfortunately, the severity of the situation may result in additional rate cut of a smaller amount. EUR/USD weakens substantially as a result, posting a loss of about 150 pips on the day. The probabilities for a potential rate cut will definitely be affected by news to come. Monday will present German Retail Sales and Sentix Investor Confidence, Tuesday has German Services PMI and EZ CPI, Wednesday will have PPI and German Unemployment, and for Thursday there is GDP and German Trade Balance, and Retail Sales for Friday. The never-ending list of news and releases will more easily confirm the bias of policy makers.

GBP/USD falls substantially in today's trading, shedding more than 250 pips. The UK is by no means unscathed from the seemingly limitless amounts of crippling economic news. First, we learned that Mortgage Approvals fell to another historical low. Perhaps not surprisingly, lending institutions have announced their continued reluctance to accepting new loans will become more stringent into the New Year. Clearly if the BoE cannot alter the ease at which individuals can obtain credit, their rate cuts will have a largely distant effect on any economic improvement. In addition, as a direct result of the sheer inexistence of credit, home prices, tracked by the HBOS House Price report, fell by the most since the records inception nearly 25 years ago. Prices fell by an additional 16.2% this month, but were surprisingly better than the consensus of a fall of 16.6%. Adding a particular level of irony to today's numbers, UK manufacturing PMI was better than expectations, coming in at 34.9. However a level under 50 still shows extreme contraction. Once again, the Monetary Meeting season is fast approaching, with the BoE starting the frenzy early next Thursday. It is largely expected that because of the continued tension in the credit market, the BoE will continue their sizable rate cuts. Since the BoE leads similar decisions by the Fed and ECB, we will receive some insight into the level of urgency that the central banks will exhibit. Among this major event risk for next week, there will be Consumer Confidence on Wednesday and PPI on Friday.

The Canadian dollar is a big mover against the dollar in today's trading, largely as the result of some big moves in energy prices. After hitting a low on December 23rd, crude prices have since rebounded with force, and are rallying more than 3.25% in today's trading. Canadian data will be sparse until next Thursday with the release of the Ivey PMI, with the Employment change to follow on Friday. Strength is not limited to the Loonie as all commodity currencies are up today in response to an unexpected revival of risk tolerance. Unfortunately, the reasoning behind this is largely unfounded in the fundamentals, and is more probably the result of the psychological effects of an entrance into a new, and hopefully promising, year. Australia released their RBA Commodity index which failed to reach expectations. Otherwise the most important data is in store for next week, including Wage Agreements for Sunday and Retail Sales for Wednesday. The same goes for the kiwi, which will report the Trade Balance on Tuesday.

The yen is a broad loser today, falling as of the result of some renewed levels of risk appetite. USD/JPY has reached a significant high today, reaching levels not seen since mid-November. Although the accomplishment seems insignificant, it might be one of the first signs of stability. This premonition is further emphasized as volatility (as measured by the VIX index) has fallen to levels not seen since the beginning of October. The commodity crosses, including AUD/JPY, NZD/JPY, and CAD/JPY, are all higher in today's trading. The relative quietness in Japanese reports has allowed these rallies to continue without any interference. After last week's big blowout of many economic reports, the Japanese schedule is understandable empty for most of next week. The only exceptions worth noting are the Monetary Base on Monday and the Leading Index on Friday. We can surmise that the only genuine market moving events for next week would be a surprising announcement of some new policy initiatives the BoJ will implement in the coming months.
EUR/USD: Currency in Play for Next 24 Hours

The currency in play for the upcoming Monday will be EUR/USD. On Monday the Euro zone is set to release German retail sales at 2:00AM EST or 7:00GMT. Further along in the day, United States is set to release Construction Spending at 10:00AM EST or 15:00GMT.

After depreciating for 3 consecutive days, the pair is currently in the range trading zone which is derived through our Bollinger Bands. The pair is on the verge of breaking a triangle formation which formed throughout the month of December. Current support is placed at 1.3750 which is a 38.2% retracement of July high and October low. Further, the support is close to the 20-day EMA. The resistance is placed at 1.4190 which is a first standard deviation of the Bollinger Bands as well as 50% retracement from July high and October low.