Forex - Markets are quiet ahead of ECB rate decision – analysts expect a 50bp cut

Forex News and Events:

All eyes are riveted on the ECB announcement today, many expecting a 50bp cut on the back of continued weakness in global demand. German manufacturing sector has continued to weaken to levels which are already inconsistent with the latest growth projections. The S&P reduced Greece’s sovereign credit rating and placed Ireland, Spain and now Portugal’s credit ratings under review. Furthermore the unconfirmed news that Ireland was seeking IMF aid was staunchly refuted by both parties only fed the already dismal sentiment on the state of the European economy on a whole. The Euro continues to be under pressure as the EURUSD traded as low as 1.3094 yesterday before recovering somewhat – despite lackluster news from the U.S.

Many large banks in the Euro-zone are suffering large declines in their stock as they report large Q4 losses. The earnings season has not only taken it’s toll on their stock, but many banks are now bringing attention to themselves as if they were in dire need of further governments funds – in the U.S the story is much the same. Yesterday Deutsche Bank, HSBC and Barclays all suffered large declines, Barclays losing as much as 14.5.

U.S Retail sales missed the consensus of -1.2% and came out at -2.7% while the Beige book reported dismal yet less gloomy than the previous release. In other developments, Citi Group announces it will give up its current business model as it merges its Brokerage operations with Morgan Stanley. Comments by JP Morgan Chase’ CEO Jamie Dimon that the worse of this recession was still to come didn’t bode well with those optimists that feel 2009 is the year of the recovery.

Japan’s Nikkei took a big hit today as the Japanese machinery orders fell the most in 21 years – contracting 16.2% from October. The decline was the largest since the data was first compiled in 1987 – the news brought the Yen 30 pips lower against the dollar, but the continued decoupling of the Yen against other currencies saw that Yen fight back and managing to gain 0.3% against the dollar since yesterday.

While the dollar’s performance yesterday was mixed against various currencies it still managed to gain against many currencies despite the un-relenting spell of bad data from U.S Equities. We expect the dollar to continue to gain in the near and medium term as risk aversion and repatriation continues to be the central themes to the greenback’s price action of late.

Today's Key Issues (time in GMT):

12:45 EUR European Central Bank Rate Decision 2.00% vs 2.50%
13:30 CAD New motor vehicle Sales (MoM) -7.4% vs -0.9%
13:30 USD Producer Price Index (MoM) -2.0% vs -2.2%
13:30 USD Empire Manufacturing (JAN) -25.0 vs -25.8
13:30 USD Initial Jobless claims (weekly) 508K vs 467K
15:00 USD Philadelphia Fed (JAN) -35.0 vs -36.1

The Risk Today:

EurUsd Market traded as high as 1.3234 but reversed most of its gains down to 1.3138 low this morning. Dollar – continues - to defy bad numbers and while the short-term trend is definitely bearish intraday charts point to a momentary base. Initial resistance continues to hold at 1.3336 in the short term and could extend to 1.3715 if broken. In the nearer term 1.3081 (November 25 high) and 1.3000 remain clear targets – choppy decline continues.

GbpUsd The Early week decline from 1.5348 to 1.4471 gives points to strong support at the 1.4470 level as the pair continues to range between 1.4475 and 1.4830. On the downside, strong support can be found in the 1.4370 – 1.4390 area as this level was tested three times near the end of 2008 and beginning 2009 – mentioned Tuesday as 1.4376 - Dec 31st low. Sentiment remains mixed to negative but renewed strength may open the way to 1.4678 and 1.4800 – with an eye on 1.5374 January 8th high – Wedge formation on graph shows a consolidation of the recent move, while we heed caution to long term bulls on cable, the RSI indicates a short term buy as we continue to channel down.

UsdJpy With the dollar expected to remain heavy against the Yen on continued risk aversion – the move that started last week that saw the Yen rally from 94.64 – 88.78, with 88.78 being tested several times before a retracement to 89.95. Initial resistance holds at 90.00 (previous support) then 91.71 (50% retracement on Yen rally) with 94.59 (Jan 6th high) still on the radar. Strong support holds at 88.78 level, further down 87.13 (Dec 17th Low) and continued strong downtrend may open way to 79.70 April 1995 low – any continued price action under 88.00 could see further BoJ intervention later in the year.

UsdChf Market traded as high as 1.1243 on Wednesday as the dollar extends gains and recovers Jan 8th low of 1.0865. Uptrend resistance stands at 1.1250 then 1.1282 - former support and possible trend up to 1.2298, 21st November high. Initial support at 1.1123 (low of current 1 week range) then 1.1088 then 1.0863 (level tested 3 times between Jan 7th and 9th) Renewed weakness may break down 1.0735 and return toward 1.0500 and 1.0375.

Resistance and Support: