Mid-Day Report: European Majors Weakens on Ukraine's Downgrade, Sterling Hardest Hit

The biggest news today is S&P downgraded Ukraine's credit rating by two levels to CCC+, worst in Europe just after Latvia was downgraded to junk a day ago. Outlook is left negative and further cut in rating is possible. The news triggered sharp selling in Eastern European currencies and drags the Euro down. Nevertheless, Sterling is hardest hit, believed to be triggered by Eastern Europe selling, and weakens sharply across the board. Dollar recovers mildly but remains bounded in consolidation and the Japanese yen retreats mildly. Aussie and Canadian dollar are steady in range. Data released in US saw Existing home sales dropped more than expected by -5.3% in Jan to 4.49m annualized rate, worse than expectation of 4.75M. Focus will turn to second round of Fed Bernanke's semi annual testimony.

In the UK, final reading for 4Q08 GDP remained unrevised at -1.5% qoq, compared with consensus of a downwardly revised -1.6% and a upwardly adjusted -0.7% in 3Q. On annual basis, GDP, however, contracted 1.9% (initial: -1.8%) following a growth of 0.2% a quarter ago. Industrial production plunged 3.9% qoq while total service industries declined 1% qoq. Downside risk to the economic outlook remains and the BOE will have to do more apart from cutting interest rate to bring economy back on track. Germany GDP confirmed to have contracted -2.1% qoq, -1.7% yoy in Q4. Imports dropped -3.6% while exports dropped -7.3%.

Released in Asia, trade deficit in Japan widened to -952.6B yen in January, better than market expectation of -1129.5B yen but almost tripled the -332.3B yen in December. The biggest deficit since 1980 was driven by the record -45.7% yoy decline in export. Shipment to the US slumped by -52.9% while that to Europe also dropped -47.4% due to global recession as well as rapid surge in Japanese yen. Economy in Japan was not better than its foreign counterparts and the imports plunged 31.7% yoy, worse than consensus of -28.2% and December's -21.5%.

EUR/GBP Mid-Day Outlook

Daily Pivots: (S1) 0.8695; (P) 0.8805; (R1) 0.8873; More

EUR/GBP's break of 0.8920 resistance argues that fall from 0.9071 is completed at 0.7825. More importantly, the corrective structure of such fall argues that rise from 0.8635 is still in progress. Focus now turns to mentioned 0.9082 cluster resistance (38.2% retracement of 0.9799 to 0.8635 at 0.9080). Break will suggests that whole corrective decline from 0.9799 has completed with three waves down to 0.8635 already. Short term outlook will be turned bullish in such case and bring stronger rally towards 0.9518 resistance next. On the downside, below 0.8725 will revive the case that fall from 0.9799 is still in progress and turn focus back to 0.8635 for confirmation.

In the bigger picture, note that rise from 0.7693 has completed with five waves up to 0.9799 (0.8195, 0.7808, 0.8660, 0.8234, 0.9799). More importantly, whole medium term rise from 0.6535 has probably completed the five wave sequence too (0.6867, 0.6678, 0.8186,. 0.7693. 0.9799). Hence, no matter how the consolidation from 0.9799 will develop into, decisive break of this resistance is needed to confirm up trend resumption. Otherwise, medium term outlook will remain neutral at best, with risk of fall to 0.8186/8234 (50% retracement of 0.6535 to 0.9799 at 0.8167) before completing the consolidation.

Forex News Digest

• Japanese Trade Deficit Widens in January as Exports Plummet
• Obama Pledges to Repair Financial System, Restore U.S. Economy
• Declines in Fourth-Quarter UK GDP Confirmed
• German Economy Confirmed to Have Contracted at Sharpest Rate Since WWII
• Dollar Rises Versus Euro as Eastern European Slump Spurs Demand for Haven
• Yen Off to Worst Start Since 2000 Against Dollar as Exports, Economy Slump
• Canada's Dollar Falls Against Greenback as Risk Aversion Returns to Market
• Bernanke Seeks to Reframe Bank-Rescue Debate, Eschewing Nationalizations
• Pound's Slide May Jeopardize British Economy, EU Officials Say in Document
• RBS May Not Escape Full Government Control After U.K.'s Insurance Program
• UBS Predicts Dollar to Strengthen to $1.25 Against Euro in Three Months
• Australian Dollar Will Advance to 72 U.S. Cents, Standard Chartered Says

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