Euro's weakness was the dominant theme in a week of important events of BoE rate decision and US non-farm payroll. The common currency was broadly lower on speculations of ECB rate cut this week. On the other hand, Pound survived BoE rate cut and rebounded strongly with support from EUR/GBP and GBP/JPY crosses. Dollar was mixed while the dollar index was sent modestly higher with support from weakness in EUR/USD. The Japanese yen was lifted by risk aversion towards the end of the week as global stock markets reversed initial rally.

Selling of Euro intensified last week after the release of weaker than expected Dec HICP which moderated to 1.6% yoy versus expectations of 1.8% yoy. Note again that ECB has the sole mandate of maintaining price stability in the Eurozone and by that, Trichet has defined price stability as close to 2%, below 2%. With annual HICP inflation now deep below ECB's 2% target, and is expected to stay there for some time, ECB could be forced to cut rates again this week on Jan 15 on the back of deepening recessions in the Eurozone.

Technically speaking, Euro has given up most of the gains in Dec that's fueled by speculations that ECB would be on hold in Jan. More importantly, note that the selling in Euro is most apparent against commodity currencies as well as Sterling. As mentioned during the week, EUR/CAD has completed a double top reversal pattern (1.7499, 1.7492) and dived to as low as 1.5752. Subsequent recovery should have completed at 1.6435 and the fall could be resuming this week to a new low, targeting medium term trend line support around 1.5 psychological level.

Dollar, on the other hand, survived another month of poor job data which saw Dec NFP contracted less than expected by -524k, a mild improvement from Nov's revised -584k. Unemployment rate, though, surged sharply to 7.2% versus expectation of 7.0%. ISM-non manufacturing index also improved unexpectedly from 33 to 40.6 in Dec. The greenback is rather mixed for the moment, pressured by yen on risk aversion but strengthened against Euro. Nevertheless, dollar index's retreat was contained at 81.19 and is tentatively treated as completed with 4 hours MACD crossed above signal line. At this moment, further rally is still in favor. Considering the broader picture of all dollar pairs and yen crosses, it's believed that the next boost for the greenback will likely be by risk aversion which sees commodity yen crosses sold off which in turn pushes up the dollar. A break above 84.01 will target 88.46 next.

Sterling survive another week of poor data and BoE rate cut as well. BoE delivered a 50bps rate cut as markets expected. The bank left the door open for further policy easing as it noted a significant risk of undershooting the 2% CPI inflation target in the medium term at the existing level of Bank Rate in the accompanying statement. BoE note that pace of contraction in activity increased during the fourth quarter of 2008 and that output is likely to continue to fall sharply during the first part of this year. There is also need to increase the flow of lending to the non-financial sector. Though, recent depreciation of Sterling may help to moderate impact from global slowdown. Focus will turn to minutes to be released on Jan 21. Industrial production and manufacturing production contracted more than expected by -6.9% yoy and -7.4% yoy in Nov respectively. Though, UK PPI moderated less than expected with core PPI unchanged at 5.0% yoy, PPI input down from 8.6% to 4.3% yoy while PPI input down from 5.1% yoy to 4.7% yoy.

EUR/GBP continued recent dive from 0.9799 and is set to take on medium term trend line support at 0.8786. Sustained break of which will confirm that at least whole rally from 0.7693 has completed and much deeper fall should then be seen towards 0.8234 support at least. A break of 0.9174 resistance is need to signal that a short term bottom is formed or outlook will remain bearish now.

Yen crosses continue to track stock markets closely and dived as stock markets fell towards the end of the week. Though, note that GBP/JPY and CAD/JPY still managed to close higher. Also, it remains to be confirmed if 9088 is the top in DOW and another rise could still be seen as long as 8367 support holds. However, break of 8367 will be an important signal that DOW's down trend is resuming. Direction of yen and commodity currencies, and indirectly the dollar, will be heavily dependent on the development in the stock markets.