Mid-Day Report: Euro Mildly Firmer as Greek Austerity Deal Reached, ECB on Hold, BoE Added QE

Euro is mildly firmer in early US session on report that Greek politicians have finally agreed on the austerity deal. The majority Socialist said that Prime Minister Papademos reached a tentative agreement with three coalition party leaders after a marathon meeting but no detail is released yet. This is confirmed by ECB President Draghi in the post meeting press conference. Focus will now turn to Brussels, where Eurozone finance ministers will meet Greek finance minister Venizelos, together with IMF head Lagarde and Draghi.

ECB left benchmark interest rates unchanged at record low of 1% as widely expected. Draghi sounded somewhat less pessimistic in the post meeting conference, saying that "economic outlook remains subject to high uncertainty and downside risks", dropping the term “substantial” downside risks. Regarding Greece, Draghi refused to comment on how ECB's holding of Greek bonds will be treated. It's reported that ECB could return the bonds to Greece through EFSF and help save Greece EUR 11b in payment. But that's not confirmed.

BoE did what markets expected, keeping rates unchanged at 0.5% and raised the size of the asset purchase program by GBP 50b to GBP 325b as "more likely than not that inflation would undershoot the 2% target in the medium term". In the accompanying statement, the bank noted that UK's recovery has slowed during 2011with slight contraction in Q4. The bank acknowledged recent improvement in business surveys but pointed to slowdown in Eurozone's market. The banks expected that with continued monetary stimulus, UK output growth will strengthen later this year. Regarding inflation, the bank expect CPI to "fall sharply" in near term as January 2011 drops out of the twelve-month comparison. Also contribution to moderation in inflation are energy price while "unemployment and spare capacity continues to restrain domestically generated inflation."

On the data front, US initial jobless claims improved further to 358k in the week ended February 4. Canada new housing price index rose 0.1% mom in December. UK industrial production rose more than expected by 0.5% mom in December while manufacturing production rose 1.0% mom. Visible trade deficit narrowed much more than expected to GBP -7.1b in December, hitting a 22-month low. Export jumped 0.9% to GBP 25.6b while imports dropped -4.6% to GBP 32.7b. Employment data from New Zealand was mixed. Q4 employment growth unexpectedly slowed to 0.1% qoq but unemployment rate also dropped to 6.3%. China PPI slowed as expected to 0.7% yoy in January. However, CPI jumped back to 4.5% yoy. The data might reinforce officials' concern that inflation is not going away yet and could complicate the plan to add stimulus to revive growth, lowering the possibility of policy loosening. Other data released saw Japan household confidence improved to 40 in January.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3224; (P) 1.3256 (R1) 1.3291; More...

Intraday bias in EUR/USD remains on the upside with 1.3214 minor support intact. Current rise from 1.2625 is expected to continue towards 61.8% retracement of 1.4246 to 1.2625 at 1.3627. On the downside, below 1.3214 minor support will turn bias neutral and bring consolidation. But break of 1.3028 support is needed to signal completion of such rebound. Otherwise, near term outlook will remain mildly bullish even in case of retreat.

In the bigger picture, price actions from 1.6039 are unfolding as a consolidation pattern in the long term and is in progress. Fall from 1.4939 is a falling leg inside the pattern. It's hard to anticipate the length of a leg of any complex corrective pattern. Also, price actions would likely remain choppy and indecisive with misleading momentum indicator readings. But after all, overall picture still favors deeper fall to 1.1875 support before the consolidation pattern completes. Though, sustained trading above 55 weeks EMA (now at 1.3637) will pave the way for a test on 1.4939 resistance level.

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