Mid-Day Report: Euro Pressured by Poor ZEW, Sterling Supported by CPI, Dollar Rallies

Euro was sold off after much worse then expected German ZEW. The investor confidence index dropped for the fourth consecutive months in January, and deeper than expected to 47.2 versus 50.4 in December. Eurozone ZEW economic sentiment also unexpectedly dropped to 46.4. The data suggests that German economy is still struggling to maintain momentum for recovery . ZEW president Franz said that "the way out of the recession is burdensome and long." Dollar is helped by weakness in Euro and concern of more tightening measures from China, and much stronger TIC capital flow, and rebounds strongly against most major currencies

Sterling spikes higher in European after much stronger than expected consumer inflation readings. Headline CPI rose 0.6% mom, 2.9% yoy in December, up from November's 0.3% mom, 1.9% yoy and beat expectation of 0.3% mom, 2.6% yoy. The sharp 1% jump in the yoy rate is the largest rise on record. Also, it's the first time since May that inflation has exceeded BoE's 2% target. Some economists believe that it's an early sign that inflation in UK is going to accelerate further in the months ahead and will likely breach the 3% limit. Nevertheless, the sharp rise in CPI is likely a result of past depreciation of Sterling only and there isn't solid support for BoE to start tightening again. However, the talk of market should have clearly shifted from whether BoE will expand quantitative easing to when is the best timing for BoE to remove policy accommodations.

Bank of Canada left rates unchanged at 0.25% as widely expected and reiterated conditional commitment to hold current policy rate until the end of the second quarter of 2010. Also, the Bank will continue to conduct term Purchase and Resale Agreements based on existing terms and conditions.

Japanese yen was lifted early today on news that China, once again, guided its one-year bill higher to curb lending growth. PBoC sold the 1 year bill at 1.9264% in open market operations, up +0.08% from last week. This is the second time in a month the PBoC guided the 1-year bill yield higher after raising yield on 3 month bills and raising reserve requirements earlier.

Dollar index's rise from 76.60 resumes after brief retreat and reaches as high as 77.63 so far today. The development is in line with the view that correction from 78.45 has already completed with three waves down to 76.60. Intraday bias remains on the upside for the moment. Break of 78.19 resistance will indicate that whole rally from 74.19 is resuming for 38.2% retracement of 89.62 to 74.19 at 80.08.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.4346; (P) 1.4373; (R1) 1.4410; More

EUR/USD's fall from 1.4578 resumes after brief recovery and dives to as low as 1.4263 so far. As discussed before, consolidation from 1.4217 should have completed at 1.4578 already after hitting 38.2% retracement of 1.5143 to 1.4217. Intraday bias remains on the downside for the moment and firm break of 1.4256 support will suggest that whole fall from 1.5143 is resuming. In such case, EUR/USD should target 38.2% retracement of 1.2329 to 1.5143 at 1.4068 next. On the upside, though, above 1.4413 minor resistance will turn intraday bias neutral again and suggest that more consolidation would be seen before fall resumption.

In the bigger picture, medium term rise from 1.2456 has completed at 1.5143 on bearish divergence conditions in daily MACD. Focus now turns to 1.3737 cluster support (50% retracement of 1.2329 to 1.5143 at 1.3736). Decisive break there will also confirm the case that three wave consolidation from 1.2329 has finished at 1.5134 too. In other words, whole medium term term fall from 1.6039 should be resuming for a new low below 1.2329. On the upside, above 1.5143 resistance is needed to invalidate this view. Otherwise, outlook will now remain bearish.

Economic Indicators Update

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