EUR buyers finally emerged at the EUR/USD 1.4250 this week and have pushed EUR/USD back to 1.4400 this morning. It is difficult to draw any strong conclusion from what is very illiquid activity, particular give that the pace of the USD’s Dec gains had made it ripe for profit-taking. That said the failure of the USD to extend its gains this week is interesting because it does coincide with some disappointing US economic data.

The downward revision to US Q3 GDP this week highlighted the precarious position of the US economic recovery and served as a reminder on how dependent is was during Q3 on government fiscal support. Yesterday, the release of softer than expected personal income and spending data reflected the lacklustre nature of the consumer sector and therefore questioned further the outlook for US growth into 2010. To make matters worse US new home sales data brought a negative shock falling 11.3% m/m. Insofar as this month’s turnaround in the USD was built around better than expected US data (predominantly labour data) which promoted the idea that Fed rate hikes could be on the horizon, it does seem likely that there will be room for disappointment on the front. Not only are US rates likely to remain low for an extended period but with inflationary pressures very subdued, the upwards trajectory of rate hikes is likely to remain shallow once the Fed does begin to tighten.

While there are risks to the US recovery story, USD bulls will find support in the fact that the prospects for both the EUR and the JPY worsened this month. Attention has been drawn back to the sovereign deficit issues within the EMU region and the BoJ has pledged to fight deflation suggesting that its policy will support the use of the JPY as the favoured funding currency. The BoJ Governor Shirakawa last week stated that deflation will not be tolerated and today pledged that he stands ready to act promptly. Technically, USD/JPY is holding close to the 100 hr sma at 91.15. The outlook for the USD vs the EUR has weakened further on the break above the 200 hr sma at EUR/USD1.4405.

The bounce in EUR/USD dragged cable back above GBP/USD1.6000 this morning. However, GBP selling re-emerged. As yet cable remains below the 200 day sma at 1.6030, a move above may strengthen to outlook for the pound. With sellers in cable still appearing to be at the ready, EUR/GBP has been drawn up to the 0.9000 area. UK deficit issues, concerns about slow growth and fears surrounding the forthcoming general election are likely to weigh on the pound at least through the spring.

NZD/USD has recovered some of the losses seen yesterday on disappointed GDP data. This can be linked with USD profit-taking.

There was no economic data in Europe this morning, but US durable goods and initial claims data are scheduled this afternoon.