USD Mixed, Awaits ECB

By IBTimes Staff Reporter | January 14 2009 3:32 PM

The dollar was little changed on the Wednesday session, hovering near 1.3170 against the euro and 1.46 versus the pound. US economic reports continue to point toward further deterioration in fundamentals raising prospects for a prolonged recession.

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Retail sales in December continued to deteriorate, plunging by 2.7% which was sharply worse than the expected improvement to -1.2% from -1.8% in November. The excluding-autos figure also dropped sharply, lower by 3.1% compared with a 1.6% plunge a month earlier. The decline in retail sales marked its sixth consecutive monthly drop - its worst on record. Business inventories were also worst than expected, lower by 0.7% for November versus 0.6% in October.

The Thursday economic calendar will see weekly jobless claims, January NY Fed manufacturing survey, December PP and the January Philadelphia Fed business index. Weekly jobless claims are seen climbing higher to 500k from 467k a week earlier, while the NY Fed manufacturing survey is expected to improve marginally to -25.0 from -25.76. Producer prices in December are seen declining by 2.0% versus a 2.2% decline a month earlier while core PPI is estimated to remain unchanged at 0.1%.

Euro Recovers Ahead of ECB

The euro bounced off a fresh one-month low against the dollar at 1.3092 to recover toward the 1.3170-handle by the New York afternoon. Eurozone economic reports released overnight included Germany 2008 GDP and Eurozone November industrial production. Germany's 2008 GDP declined to 1.3% from 2.5% in the previous year. Meanwhile, Eurozone industrial production in November declined by 1.6% versus a 1.2% decline a month earlier.

The key highlight for the coming session will be the ECB monetary policy decision at 7:45 AM New York time. The Bank is largely expected to ease rates by 50-basis points to 2.0%. The subsequent press conference will be closely scrutinized for clues as to whether further rate cuts can be anticipated over the coming months. We look for the ECB to continue slashing its benchmark interest rate, with another 100-basis point in cuts over the coming year.

EURUSD has recovered back toward the 1.3170 level, with additional resistance seen at 1.32, followed by 1.3240 and 1.3270. Subsequent ceilings are eyed at 1.33, followed by 1.3350 and 1.3380. On the downside, support is seen at 1.3140, backed by 1.31 and 1.3070. Additional floors will emerge at 1.3030, followed by 1.30 and 1.2960.