EURUSD can't sustain above 1.3000 ahead of tomorrow's ECB decision. EURGBP ready for another leg down despite BOE cut tomorrow?


  • US Weekly ABC Consumer Confidence rose to -52 from -54 the previous week
  • US Jan. Vehicle Sales fell to 6.9M from 7.8M in Dec.
  • Australia Jan. AiG Performance of Services Industry rose to 41.0 from 39.3
  • UK Jan. Nationwide Consumer Confidence fell to 40 from 48 in Dec.
  • Australia Dec. Building Approvals fell -32.9% YoY vs. -29.7% expected
  • China Jan. Manufacturing PMI rose to 45.3 from 41.2 in Dec.
  • Germany Jan. Final Services PMI out at 45.2 vs. 45.4 originally
  • EuroZone Jan. Final Services PMI out at 42.2 vs. 42.5 originally
  • UK Jan. Services PMI out at 42.5 vs. 40.3 expected
  • EuroZone Dec. Retail Sales fell -1.6% YoY vs. -1.4% expected
  • UK BRC Shop Price Index rose 1.1% YoY


Events Today:

  • Norway Norges Bank to Announce Deposit Rate (1300)
  • US Jan. ADP Employment Change (1315)
  • US Jan. ISM DOE Crude Oil and Product Inventories (1530)
  • New Zealand Q4 Unemployment Rate and Employment Change (2145)

Market Comment:

Yesterday turned into a frustrating one for trend followers, who apparently got squeezed out of their USD and JPY longs as equities climbed rapidly and distanced themselves from the big structural support levels of late. But the action in the first half of the European session seems to be showing us that the moves in FX were mostly a squeeze on positioning rather than a sustainable new development as the USD and JPY came storming back, together with a new and odd companion - the pound sterling. Yesterday, Goldman Sachs' chief economist Jim O'Neill said that the UK was no Reykjavik-on-Thames, one of the better quotes of the New Year (the phrase was actually coined by Buiter, a former BOE member). His point being that the pound is extremely cheap and has priced in a lot of bad news. We tend to agree and wonder if GBP is poised for a further comeback versus its European rivals. See more in Charts below.

The USD strength is coming despite further embarrassment in the Obama administration over the stepping down of Tom Daschle, the secretary of health and human services nominee and Nancy Killefer, another nominee for a key post. Perhaps the chief reason for USD strength here is the growing resistance to Obama's stimulus plan as currently conceived: the Senate Republicans are heavily resisting the size of the package and showing sharp partisan discipline even as Obama talks up bipartisanship. Even a few Democrats are blanching at the magnitude of the stimulus and the press is picking at some of the more wasteful and pork-ridden details of the plan. A smaller stimulus package puts less pressure on the fiscal horrors that await the US government down the road as it engages in profligate spending to stave off a depression. Clearly, at least, this factor seems to be outweighing the correlation with stock markets of late.

Australia reported an enormous rise in retail sales in December, the most in eight years, in fact. Most commentary focused on the degree to which recent stimulus measures were responsible for this boost, and in any case, AUD didn't get any boost on the news, as yesterday's equity-induced rally faded quickly. AUDUSD looks heavy in the European session and the trendline support in the 0.6250 area looks very key as a possible downside trigger for a go at 0.6000.

On the protectionist front, the EU was out complaining about provisions in the new stimulus bill that require a Buy American stance on public outlays and said that it could possible trigger trade litigation. Again, protectionism is a hot button theme going forward.

Up tomorrow we have the two key interest rate decisions from the Bank of England and the ECB. While the headline consensus suggests that the BOE will cut 50 bps, though some analysts are looking for a 100-bp reduction to bring the rate all the way to 0.50%. The foot-dragging ECB, meanwhile, is widely expected to keep rates unchanged at 2.00%. This leaves some room for a GBP-positive surprise if the BOE only moves by 50 basis points.

Today's data includes the ADP employment change report, which is expected to come in at only a bit worse than -500k, after last month's near -700k shocker. The weekly claims are showing no signs of slowing and as employment is a lagging indicator in general, it would seem that at least another 3 months of heavy job reductions is in the pipeline before we can look at a possible deceleration in the rate at which Americans are losing their jobs. More on the US employment report tomorrow.

Watch out for the Norges Bank decision. After playing some catchup with an enormous 175-bp chop to rates in December, consenus is only looking for a 50-bp reduction today in rates to bring the deposit rate to 2.50%. Could Norway go 100-bps? NOK has rallied heavily of late, there would seem to be room for some consolidation weaker if the bank surprises with a bigger cut, and maybe even if it doesn't, should equties head south again.


GBP ready to make a move vs. EUR and CHF? The consolidation rally failed to take out the 55-day SMA in EURGBP, where resistance at 0.9080 is now very clearly in place. A move below the recent lows around 0.8800 could open up for a challenge of 0.8660, the old high.