Forex - Risk aversion as the primary theme in FX markets this week

Forex News and Events:

For the start of the trading week, we see risk aversion as the primary theme in FX markets. The weak US GDP data on Friday, combined with disappointment over the EU summits rejection of a mass aid package or CEE fund, has put pressure on risk appetite. The US real GDP for Q4 was revised lower to an annualized -6.2% rate (exp 5.4%) from -3.8%, as growth from inventories was lower than anticipated. EU policy markers on Sunday rejected a bailout of central and eastern European countries, opting instead for a case-by-case solution. German Chancellor Merkel stressed that each eastern European country was faced with unique challenges and aid would need to be channelled through international institutions such as the IMF. We expect the situation between East / Central and Western Europe to intensify as pressure for the deteriorating data pressures regions. The greenback should remain the main recipient of this elevated risk aversion environment, and we see little in the near futures which would shift this outlook. This week there is a range of critical economic data in both G10 and EM counties and blended with monetary policy decisions. As US data continues to erode in ISM and NFP data this week and equity index remain under pressure, we expect the Usd to remain firm. The UsdCad opened around the February high at 1.2750, while the EurUsd is approaching yearly lows at 1.2514. The DXY has broken above its Nov 2008 high. This week the RBA, BoC, BoE and ECB should all be lowering rates. The first up is the RBA, who is expected cut the official rate 25bp to 3.00%. Recent economic data out of Australia indicates that growth prospects are brighter than most nations and comments from RBA Governor Stevens also commented that the country has held up rather well, has caused some analysts to expect the central bank to hold rates steady. Perhaps the most anticipated rate monetary policy meeting will be the ECB on Thursday. It’s universally expected the ECB will resume cutting rates 50bp to 1.50%. In addition, we expect, in the subsequent press conference, ECB President Trichet to acknowledge that the Eurozone indicators are deteriorating and further cut (we expect to .50%) is necessary.

Today's Key Issues (time in GMT):

09:28 GBP Manufacturing PMI, index Feb 34.8 exp , 35.8 prior
09:30 GBP BoE mortgage approvals, K Jan 32 exp , 31 prior
09:30 GBP BoE net mortgage lending, £ bn Jan 1.5 exp, 1.9 prior
09:30 GBP BoE net consumer credit, £ bn Jan 0.5 exp, 0.3 prior
10:00 EUR "Flash" HICP, % y/y Feb 1.0 y/y exp, -0.8 (1.1 y/y) prior
13:30 CAD GDP, % m/m Dec -0.6 exp , -0.7 prior
13:30 USD Personal income, % m/m Jan -0.3 (1.1 y/y) exp, -0.2 (1.4 y/y) prior
13:30 USD Personal spending, % m/m Jan 0.3 (-1.2 y/y) exp, -1.0 (-1.1 y/y) prior
13:30 USD Core PCE price index, % m/m Jan 0.1 (1.6 y/y) exp, 0.0 (1.7 y/y) prior
13:30 USD PCE price index, % m/m Jan -0.5 (0.6 y/y) prior
15:00 USD ISM manufacturing, index Feb 34.0 exp, 35.6 prior
15:00 USD Construction spending, % m/m Jan -1.5 (-4.4 y/y) exp, -1.4 (-3.6 y/y) prior
17:45 USD FRB of Richmond President Lacker speaks on "A View from the Fed"
18:30 CHF SNB Chairman Roth speaks on "Global crisis: how is Swiss affected?"

The Risk Today:

EurUsd Sentiment shows market is prepared for addtional EUR weakness. Pair is currently looking to test 1.2514 Feb lows. Intraday momentum indicators are pointing to slightly oversold conditions however consolidation below 1.2750 points further weakness. A break of 1.2514 will place the focus on 1.2424 then 1.2330 (oct 08 lows).

GbpUsd Still rangebound but looking to test horizontal support at 1.4111. Bullish divergance in 240 min chart points intraday correction however failure to break support should lead to a retest of 1.4515 trend resistance.

UsdJpy Short term correction of last weeks Usd rally seem to be fading. Daily RSI has dipped below overbought conditions yet weekly momentum charts are bullish. Failure to pentatrate 96.35 gives scope for another run at 100. Short term resistance stands at 98.75

UsdChf Consolidation continues. Steady bullish trend since 1.1463 key reversal low (feb 23rd) looks to target 1.1885 reversal high. A break of channel support at 1.1615 is required trigger a further slide to 1.1295

Resistance and Support: