daily analysis, mid-and long-term outlook

A DEEPER LOOK INTO THE CHANGES THIS WEEK:

Credit markets remain extremely tight as the spread between junk-rated corporate bonds and U.S. Treasuries surged more 8 bps to trade close to 616 bps.
Short term interbank lending rates remain well above government bond yields of similar maturity.

STOCK MARKET: HOW IS IT DOING?

The equity bears have come out in full force with fears of a US recession accenting persistent credit market problems and scores of disappointing fourth quarter earnings reports. The benchmark, US stock indexes have been steadily falling since last week. The Dow fell as much as 6.7 percent from last Wednesday's close, adding to a massive 18.1 percent correction from last year's record high. A new leg in this evolving bear market seemed to begin over the Martin Luther King Jr. bank holiday. Though US markets were closed, stock benchmarks across the world were in free fall. In an attempt to avert a stock market crash on par with those in 1998 and 1987, the Fed announced a surprise 75 bp cut to the Fed Funds rate before the US markets opened on Tuesday. Despite the aggressive easing, stocks continued to lose ground.

A DEEPER LOOK INTO THE CHANGES THIS WEEK:

The bear market seems to have taken a hold of all the major sectors of the broader equity market. Growing speculation of a looming 'hard landing' for the world's largest economy has weighed on the forecast for revenue and activity in general. For most large corporations, the tangible drop in consumer spending and confidence as well as durable goods orders has clearly lowered the outlook for sales for 2008. Not even the Fed's considerable inter-market easing could help trigger a rebound. Consumer-related sectors seemed to believe lower lending rates would do little to ultimately encourage spending.
If any market sector should have responded to the benefit of a 75 bp cut to the Fed Funds and discount rate, it would have been the financial sector. And, though the group gapped open on the open to adjust to the global sell off on Monday, the financials did rally with the additional access to liquidity and reduced cost in lending – the bread and butter for banks. What's more, the rebound that has just begun to develop shows promise. The Bank of America's 95 percent drop in fourth quarter earnings reported yesterday represented the last of the major financial earnings reports for the season.

U.S. CONSUMER: HOW ARE THEY DOING?

Surprisingly positive University of Michigan Consumer Confidence and Initial Jobless Claims numbers temporarily boosted sentiment for the domestic consumer, but outlook clearly remains dim for all spending-linked industries. Further deterioration in housing construction measures has only compounded fears of the ongoing real estate recession, and relatively little stands in the way of a further deterioration in housing conditions. All else remaining equal, such trends will undoubtedly hurt overall consumption levels in the broader economy.

A DEEPER LOOK INTO THE CHANGES THIS WEEK:

Extreme volatility in Mortgage Applications likely reflects the underlying difficulty in obtaining mortgage credit. This has coincided with further routs in all relevant housing sales indicators, and the confluence of falling credit demand on home sales underlines the difficulty in the domestic real estate sector. Housing Starts fell to fresh depths through December, and fast-slowing new construction will only sink Housing Starts further through the medium term.
Continued stock market routs have unsurprisingly left housing-linked stocks at further lows, but it is interesting to note that Home Depot and Walmart stocks have remain relatively bid. The discount retailer saw a sizeable rally on speculation that it may see more business as consumers turn to lower-cost goods, while Home Depot saw itself marginally higher on analyst upgrades on valuation. Yet the facts remain relatively clear: outlook is dim for the vast majority of all housing and consumer spending-linked stocks.

Currency Crosses: Euro Commodity Crosses Offer Clear Trade Setups

EURAUD

Commentary - We still favor a EURAUD deeper correction. We favor a deeper correction because wave 5 of the 1.5491-1.7159 rally was extended, and extended 5ths are often fully retraced. This is just in front of the 61.8% of 1.5491-1.7159 at 1.6128. Potential support prior to that level is the 50% at 1.6325 (11/19 low is at 1.6316). (note, W-X--Y indicates that a larger complex correction is unfolding). An alternate count suggests that larger wave 2 is complete at 1.6476. This is setting up to be one of the better trades of the year. Aggressive traders can trade from the bearish side against 1.6810 for the drop to the 1.6130/50 area.
Strategy - Getting bullish near 1.6150

Bank of Japan (BOJ)

 

1. Overnight Call Rate: 0.50%
2. Last Change: Feb-21 (+25bp)
3. Next Decision: Feb-16
4. Governor: Toshihiko Fukui
5. URL: http://www.boj.or.jp/

BOJ) Monthly Report of Recent Economic and Financial Developments January 2008 (The Bank's View)
English translation prepared by the Bank's staff based on the Japanese original)

1 This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on January 21 and 22, 2008.
2 The text of "The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on January 21 and 22, 2008.

January 22, 2008
Bank of Japan
Japan's economy is expanding moderately as a trend, although the pace of growth seems to be slowing mainly due to the drop in housing investment.
Exports and production have continued to increase. Business fixed investment has also continued to trend upward against the background of generally high corporate profits. Private consumption has been firm in a situation where household income has continued rising moderately. Meanwhile, public investment has been sluggish and housing investment has dropped substantially.
Japan's economy is expected to continue expanding moderately, although the pace of growth is likely to slow for the time being.
Exports are expected to continue rising against the background of the expansion of overseas economies as a whole. Business fixed investment and private consumption are likely to follow an uptrend against the background of high corporate profits and the moderate rise in household income. Housing investment is expected to recover gradually, although it is likely to remain sluggish for the time being. In light of these increases in demand both at home and abroad, production is also expected to follow an increasing trend. Public investment, meanwhile, is projected to be on a downtrend.
On the price front, the three-month rate of change in domestic corporate goods prices has been positive, mainly due to the rise in international commodity prices. The year-on-year rate of change in consumer prices (excluding fresh food) has become positive.
Domestic corporate goods prices are likely to continue increasing for the time being, primarily reflecting the rise in international commodity prices. The year-on-year rate of change in consumer prices is projected to follow a positive trend due to the rise in prices of petroleum products and food products in the short run and the positive output gap in the longer run.
As for the financial environment, the environment for corporate finance is accommodative. Credit demand in the private sector has been more or less flat. The issuing environment for CP and corporate bonds has been favorable as a whole, although issuance spreads on those issued by firms with low credit ratings have expanded slightly. Lending attitudes of private banks have continued to be accommodative. Under these circumstances, the amount outstanding of lending by private banks has been increasing moderately, and the amount outstanding of CP and corporate bonds issued has been above the previous year's level. Funding costs for firms have been more or less unchanged. Meanwhile, the year-on-year rate of change in the money stock is around 2 percent. As for developments in financial markets, in the money markets, the overnight call rate has been at around 0.5 percent, and interest rates on term instruments have been around the same level as last month. In the foreign exchange and capital markets, the yen has appreciated against the U.S. dollar compared with last month, while long-term interest rates and stock prices have fallen compared with last month.
Developments in Japan's economy have so far deviated somewhat downward from the projection presented in the Outlook for Economic Activity and Prices (the Outlook Report) released in October 2007, mainly due to the protracted decline in housing investment. As a result, the rate of real GDP growth in fiscal 2007 is likely to be slightly lower than the potential growth rate. However, with a virtuous circle of growth in production, income, and spending remaining basically intact, in fiscal 2008 the rate of real GDP growth is likely to be broadly as projected and slightly higher than the potential growth rate, as housing investment is expected to recover gradually. Due attention should be paid to factors that will affect this outlook, such as uncertainties regarding future developments in overseas economies and global financial markets, as well as the effects of high energy and materials prices. As for prices, the rate of increase in domestic corporate goods prices for both fiscal 2007 and 2008 is likely to be higher than the projection in the Outlook Report, mainly due to the rise in international commodity prices. 3 Meanwhile, the rate of increase in consumer prices for fiscal 2007 is likely to be somewhat higher than the projection in the Outlook Report due to the increase in prices of petroleum products and food products. In fiscal 2008, consumer prices are likely to be broadly as projected, since it is likely that the effects of the increase in prices of petroleum products and food products will remain while the effects of a temporary slowdown in the economy will emerge.

FX Briefing

Highlights

1. Recession fears (and possibly SocGen sales) cause stocks to plummet
2. Fed cuts interest rate by 75bp, further step likely on Tuesday
3. ECB refuses to cut interest rates for the time being, but growth risks are increasing

Fed Takes Emergency Action after Stocks Crash

The stock market crash was the dominant theme on the financial markets this week. On Daikan, the coldest day of the year according to the Japanese calendar, Asian stocks were the first to plunge, followed by European shares. At its lowest point on Wednesday, the German DAX had lost nearly 13% compared to the closing prices the previous Friday, and the EuroStoxx 50 just under 12%. The Nikkei index fell over 9%, the Hang Seng almost 14%. The crash was caused by market participants' uncertainty as to the consequences of the housing market and credit crisis primarily for the US, but also for the rest of the world. On Thursday, it emerged that Société Générale's fire sale of the long positions amassed by a rogue trader after the fraud came to light (with losses amounting to almost €5bn), could possibly have contributed to the stock market crash.
Thanks to the public holiday on Monday, the US markets were not affected by the crisis at first. Then on Tuesday, there were rumours that the Fed was about to make an emergency interest rate cut. And sure enough, shortly before the start of trading in America, the US central bank announced a 75 basis point cut in the Fed funds rate to 3.5%. The Fed's action probably prevented a bigger slide in US stocks: the Dow Jones only lost about 4% at most, which was relatively moderate. However, at first equity markets were uncertain as to whether they could really bank on the Fed's support. On Wednesday, shares plunged again before starting to recover significantly during late US trading. On Thursday and Friday, Asian and European markets picked up again too.
Last year equity market volatility peaks always seemed to go hand in hand with a sharp increase in yen volatility and the yen gaining against practically all currencies. This pattern reflects in the unwinding of risk positions on the forex market, particularly carry trades. Usually during these phases, the dollar has strengthened against other currencies, particularly against the euro, partly because the dollar is not often used as a carry currency, and partly because, when risk aversion increases, dollar-orientated investors tend to go back to the dollar as their home or base currency. This reaction pattern was evident last week too. Whereas USD-JPY fell from around 107 towards the end of the previous week to a low of 105, EUR-JPY dropped about 5 JPY to just over 152. When equity markets started calming down again, the movement reversed, and USD-JPY rose to about 107.50, and EUR-JPY to around 158.50. EUR-USD dropped from 1.4650 at the end of last week to below 1.44 on Wednesday, only to recover again to over 1.47 in the latter half of the week.
Contrary to the European equity markets, the euro will probably have gained slightly against the dollar and the yen at the end of the week. Once again, monetary policy is the main reason for this development. The US central bank's latest interest rate step has made it quite clear that stabilising economic growth is its top priority. In its statement last Tuesday the Fed said that "appreciable downside risks to growth remain", thus indicating the future path of monetary policy. The Fed also promised that it would "act in a timely manner".
Against this backdrop, market expectations that the FOMC will cut interest rates again at its regular meeting next Tuesday, are quite plausible. Bearing in mind that in the past months, the Fed has always been keen to stay ahead of the curve, we think it possible that the Fed funds rate will be cut again to 3%.
In contrast, the ECB is signalling that due to inflation risks, interest rate cuts are not on the agenda for the time being. ECB president Jean- Claude Trichet, ECB board member Jürgen Stark and Bundesbank president Axel Weber all confirmed that growth in the eurozone is basically robust. Some recent economic data support this view. Neither the ifo business climate index nor the consumer climate index showed any sign of weakening further. French business confidence also remained stable in January.
Last week we pointed out that ECB representatives' tone was becoming a little more dovish. We are still sticking to this view. The most recent comments also show that, in the ECB's view, growth risks are now higher than they were a few weeks ago. We are therefore expecting the ECB governing council to make its monetary policy position somewhat more "open" or more "flexible" at the beginning of February. The fact that the oil price has gone down to about $90 will give the council a bit more scope to do so. The Fed's interest rate cuts have greatly increased the euro's interest rate advantage.
Whereas the ECB is holding back, further monetary policy loosening is on the cards in the US, both in the short term, i.e. at the next meeting, and in the longer term. In this environment, the dollar is not likely to make a sustained recovery, particularly as the economic risks originated and are centred in the US. The numerous US economic indicators due to be released next week, including Q4 GDP, the ISM index and the January labour market report, are more likely to weigh on the dollar.

The Good and The Bad

US

Good News

1. Decline in initial claims to a very low 301K may be distorted, as the report is out of line with other indicators and continuing claims rise close to the highs of the cycle.
2. Michigan consumer sentiment unexpectedly improved in January. Confirmation needed.

Bad News

1. Sharp drop in Philly Fed survey to -20.9 from -5.7 and to a lesser extent also in the Richmond Fed suggests the manufacturing sector is rapidly sliding in a deeper slump.
2. Housing starts and permits drop again in December signalling housing sector has not yet reached the bottom.

Summarizing: The few US data published over the week couldn't change the assessment that the US economy may be heading for a recession, which would lead to further rate cuts of the Fed. In the light of recent financial turmoil and problems within the monoline insurance business, we have lowered our FF target to 2.5%.
Euroland

Good news

1. Despite the financial market turmoil and US slowdown (recession), the manufacturing PMI kept up quite well in January and stabilized at a decent 52.6. Strong industrial new orders appeared to confirm this.
2. German IFO unexpectedly rises in January suggesting the German economy slowing only moderately.

Bad news

1. Decline in the services PMI suggests activity in the services sector decelerated to the slowest pace since 2003.

Summarizing: The first business confidence surveys of the month January suggest euro zone economic growth is still continuing albeit at a more moderate pace. A further slowing in growth to below trend will damp inflationary pressures and lead to rate cuts at the ECB too.
Forex Market

EUR/USD holds sideways trading range

It was again a very rough week on global financial markets. At the end of last week, (US) stock markets broke below several key support levels and this set the tone for trading on almost all markets. Risk aversion was again the dominant theme for trading and this also left its trace on the currency markets. However, compared to the sharp swings and close-to-panic trading conditions on other markets (bonds, equities & and some parts of the credit markets), the swings on the currency markets remained within reasonable limits.
In line with market behaviour in periods of market stress recently (e.g. in August), the euro again had the most ‘carry currency like' characteristics if compared to the dollar and the yen. So, the stock market sell-off and the uncertainty on the fate of the monoline insurers at the end of last week and early this week again kept EUR/USD under downward pressure, as safe haven yen buying in EUR/JPY through the cross rates also weighed on EUR/USD. Also the fact that European stock markets were hit much harder compared to the US was not really a help for the single currency. EUR/USD set an intraweek low in the 1.4365 area in early trading on Tuesday.
However, the wind changed later that day and the 75 basis points Fed inter-meeting rate pulled the trigger for a EUR/USD comeback. The aggressive action from the Fed initially also raised market speculation that the ECB will be forced to do the same anytime soon, but at least for now Trichet and Co (Weber) showed great reluctance to give in to this kind of market pressure. So, EUR/USD returned to the middle of the established sideways range on Wednesday and stabilizes in the 1.46 area at the moment of writing.
For the next days, the developments on the stock markets and the debate on interest rates (Fed decision on Wednesday and ECB talk) will again be the drivers for EUR/USD trading.
Regarding the Fed, we hold on to a scenario of an additional 50 basis points rate cut next week. However, we are aware that this is no done thing. With respect to the ECB we hold on to our standing view that also the ECB will cut rates in spring, but any ECB action will be much more limited compared to what one can expect from the Fed. In a day-to-day perspective, we don't expect the ECB to really amend their rather hawkish talk before the February 07 interest rate meeting/press conference. The Ifo survey and euro zone PMI's released this week were far from dramatic and also suggest that the ECB has still room of manoeuvre before making the (big?) U-turn on interest rates.
Looking forward, periods of elevated market tension will continue to weigh on the euro in general and on EUR/USD in particular. However, if the dust settles and if global markets enter some calmer waters, one can expect that absolute interest rate levels and interest rate expectations will again get some more weight in currency trading. In that context the downside in the single currency should remain rather well protected, at least short-term term.
We maintain on our standing view that it is too early to turn more dollar positive as long as there is no evidence that the US economy is bottoming out and as long as there is no visibility on how far the Fed will have to cut rates. These conditions won't be fulfilled anytime soon, we think.
Looking at the graphs, EUR/USD currently trades in the middle of the established 1.43/1.4968 sideways/ consolidation range. This week's price action reinforced our view that short-term, the key 1.4310 downside of this rang is rather well protected. So, we maintain our buyon- dips strategy in this pair and look for return action higher in the mentioned rage. As the short-term interest rate futures already price in a lot of Fed easing going forward, there is also no immediate trigger available to see EUR/USD break the topside of this range anytime soon. So, return action towards 1.49 levels could be a good reason to at least lock in part of the profit. Nevertheless, the ongoing harsh ECB talk is a very good reason not to row against the tide even if the EUR/USD rebound shifts into a lower gear in case of a retest of the 1.4968/1.50 area.

The technical Analyst's Tribune:
EUR/USD (1.4667):
DAILY CHARTS: Correction from 1.4968 has put the pair below the channel bottom off August 2007 low (see graph).
1st Support area at 1.4516 (weekly Bollinger midline), with next levels at 1.4420 (break-up hourly) and 1.4365/ .4310 (Jan 22 low/ Dec 20 low + see graph: neckline of Double Top): tough to sustain through on 1st attempts.
1st Resistance area at 1.4741 (broken weekly Short Term Moving Average↑), with next level at 1.4792 (breakdown hourly): must sustain back above to signal renewed bullish pressures on € and reopen risk towards 1.4923 (current recovery high off 1.4310) and 1.4968/ 1.5000 = new historic high/ psycho: suspect tough on 1st attempts.

USD/JPY: yen disappoints

The turmoil on global markets again caused strong demand for safe haven assets and in the currency markets the yen is still one of the favourite targets for traders and investors looking for shelter. However, compared to the extreme reactions on other markets, the yen gains in a weekly perspective were limited. USD/JPY set a new reaction low in the 105. area on Wednesday but rebounded to the mid 106 area at the moment of writing. The swings in EUR/JPY were more pronounced but also this pair is again very close to the level that was on the screens last week. So, yen bulls can only be a bit disappointed that the storm on global markets didn't yield more yen gains. USD/JPY and EUR/JPY are still below key resistance levels (EUR/JPY 158.70 and USD/JPY 117.22/97), but this is not guaranteed either.
The recent data from Japan are again far from comforting and policy makers (especially the politicians) show a growing unease and feel the need to take, or at least propose, measures to address the financial and economic uncertainty. In this context, politicians and investors also start to look at the BOJ hoping for some monetary easing. We would be a bit surprised to see the BOJ easing monetary policy from the current low levels, but the debate and the market speculation on such a move only illustrates that the Japanese economy (again) enters a difficult period. This deserves further monitoring, but for now this isn't a major factor for yen trading. Of course, if the negative economic news headlines persist one can also expect growing domestic pressure to prevent any further gains of the yen.
At this stage, we still think the risk appetite and risk aversion to remain the dominant theme. On the other hand, given the rather moderate yen gains recently, there is also no urgency for the BOJ to come out with the threat of currency interventions either.
Last week, we maintained our yen positive call even if our first target at 107.22 was met as we expected the poor stock market sentiment to remain a yen positive factor. As indicated above, we are a bit disappointed on the yen performance this week. In case global market tensions ease, some yen correction is very well possible. EUR/JPY returning above the 107.22/97-area would open the way for return action to the 109/110 area. In a longer-term perspective, we are far from convinced that we've already seen the last episode of the credit crisis tale. So, while turning more yen cautious in a day-to-day perspective we remain yen positive longer term. The 101.68 2005 low remains the next high profile target on the USD/JPY charts

USD/JPY (106.65):
DAILY CHARTS: New reaction low and currently back below key Support area of 108.96 (2006 low + see graph: neckline of a Long Term Double Top). Resistance area at 108.47/108.61 (breakdown weekly/ daily), with next levels at 109.86 (weekly Medium Term Moving Average↓) and 110.11 (Jan 10 high): needs to sustain back above to call end of alert on $.
Support area at 105.44 (break-up hourly), with next levels at 104.95 (new reaction low off 2007 high) and 104.01 (Irregular C wave projection off 124.14), where a pause would be expected.
If wrong, risk back towards 101.67/ 101.22 (2005 low and last heavy intervention by BOJ/ 1999 low).

EUR/JPY (156.40):
DAILY CHARTS: The drop from 167.65/ .73 sent the pair below the neckline of a Medium Term Double Top (158.70: see graph).
1st Resistance at 157.94 (breakdown daily Jan 15), with next levels at 158.70 (see above), ahead of 159.90 (breakdown daily Jan 14).
161.67 = weekly Medium Term Moving Average↓: must sustain back above to call end of current alert on €.
1st Support area stands at 153.54 (break-up hourly), with next levels at 152.10 (current reaction low off 167.73), where a pause would be expected.
If wrong, 150.73 = 1st target off 158.70, ahead of 149.67/ .25 (2nd target/ August low): tough on 1st tests.

EUR/GBP: sterling rally short-lived?

After a correction last week, the sterling rebound halted on Friday last week, after a poor UK retail sales report. Despite the turmoil on global markets the EUR/GBP pair this week traded in a remarkably stable trading range in the 0.74 big figure. The focus of the markets obviously was elsewhere and there were no high profile data releases to trigger a sharp move in sterling either.
Nevertheless, we retain some interesting comments from BOE governor King. He didn't contradict the market expectations for a rate cut at the February meeting but obviously refused to make any further engagements further out. This could be considered as rather hawkish. Of course, the eco data will decide and in this respect we remain rather pessimistic on the UK economy going forward into 2008. However, the BOE governor rather joined the ECB-approach than the FED one. On the other hand, the BOE Minutes indicate that the Bank turned more negative on the sterling as they acknowledged that the long-run equilibrium value of the real sterling could be lower than previously thought by market participants.
Regarding the EUR/GBP price action, last week we indicated that we didn't expect the sterling rebound to have strong legs and in this respect it was important that the 0.7389 previous high perfectly played its role as support for EUR/GBP. Short-term, in line with EUR/USD, we maintain our buy on dips approach in EUR/GBP for a retest of the highs. In a medium term perspective, the pair should stay above the 0.7240 area. A break below would seriously question our sterling negative view.

EUR/GBP (0.7472):
DAILY CHARTS: New Long Term high, with correction from .7614 having sent the pair back towards broken channel top off Sept 2007 (see graph).
1st Support at .7440 (reaction low hourly), with next levels at .7397/ .7389 (current reaction low off .7614/ previous high).
.7364/ .59 = break-up daily Jan 01/ 23.6% retracement of the rise from .6536 to .7614: ideal area to stay above to keep current Medium Term positive bias for € intact.
Long Term upbias intact while above .7254/ .39 (previous highs 2003/ 2007).
1st Resistance at .7525 (breakdown daily), ahead of .7562 (76.4% .7614 to .7397): suspect tough on 1st attempts.
If wrong on that call, next levels would come in at.7595/ .7614 (weekly Bollinger top/ new high), where a pause would be expected.

Yeah may be, but we can not presume 100%...

Weekly Currency Wrap-up

Market volatility was extremely high over the week as major moves in the equity and bond markets spilled over into the currency markets. Global recession fears increased sharply over the first half of the week before some composure returned.
The dominance of risk conditions was illustrated by the fact that the yen strengthened to test the 105.0 level against the dollar before retreating to 107.80. The Euro also weakened sharply to near152.0 against the yen before recovering strongly to 159. Similarly, the Euro weakened to 15-month lows against the Swiss franc before a recovery.
The dollar gained support when global stock markets weakened sharply even though fears were triggered to a considerable extent by fears over the US economy. As some stability returned, the dollar encountered significant selling pressure with a renewed focus on yield.
The Federal Reserve held an emergency meeting ahead of the scheduled January meeting and announced a 0.75% cut in the Fed funds rate to 3.50%. The Fed also cut the discount rate by 0.75%. Regional Fed President Poole voted against the interest rate move with concerns that it was not justified ahead of next week’s meeting.
Even with an aggressive cut, markets were still pricing in the potential for a further cut in rates at the regular January 30th FOMC meeting.
There were plans to support the US bond insurers following warnings that their credit ratings could be downgraded. The administration also proposed a fiscal support package of around US$150bn including tax rebates.
Jobless claims were again below expectations in the latest reporting week at 301,000 from a revised 302,000 the previous week. Existing home sales edged slightly lower to an annual rate of 4.89mn in December from 5.00mn previously. Inventory levels fell over the month back to below 10 months supply while prices were little changed.
The German IFO business confidence index was stronger than expected with an increase to 103.4 in January from 103.0 the previous month. Despite the IFO survey, there were increased expectations that the ECB would switch policy within the next few weeks.
Comments from ECB officials were generally mixed with President Trichet stating that the bank would need to react to a crisis situation. Most ECB members still took a tough stance on inflation, especially from Weber. The Spanish Finance Minister stated that some members of the ECB were considering a cut in interest rates.
The dollar strengthened to highs near 1.4350 against the Euro when risk aversion peaked, but the US currency then weakened sharply to lows beyond 1.4750.
The Bank of England minutes from the January MPC meeting recorded a 8-1 vote for unchanged rates with Blanchflower voting for a 0.25% rate cut to 5.25%. The bank was more concerned over the inflation outlook and looking to wait for the inflation report.
Bank Governor King and MPC member Sentance both warned that the economy was facing a much more difficult period, but also pointed to the increased inflation risks.
Fourth-quarter GDP slowed to 0.6% from 0.7% previously, although this was slightly stronger than expected. Services-sector growth also slowed to 0.6% in the three months to December. The CBI industrial survey held steady in the latest monthly survey while there was a further drop in mortgage approvals to a 10-year low.
Sterling was unable to make much impression on the Euro during the week and weakened to lows below 1.94 against the US currency before a recovery back to 1.9820 as the dollar stumbled and risk aversion eased.
The Canadian dollar was also influenced strongly by levels of risk aversion over the week and dipped to lows beyond 1.0350. A rally in commodity helped support the currency and there was relief that the Bank of Canada interest rate cut was held to 0.25% with the currency strengthening back to beyond 1.01.

EURUSD

Although the recovery off the 1.4364 low posted on the Jan 22'08 has seen EUR break and close above its key resistance at the 1.4751/52 zone, its Nov 09'07/Dec 11'07 on Thursday, holding above that area is now needed to increase further strength towards its Mid- Jan'07 high at 1.4921.A turn above there will set the stage for an acceleration towards its 2007 high at 1.4967 ahead of the 1.5000 level, marking its psycho level. The daily studies remain in alignment with the above scenario as they are heading higher. On the downside, a failure to convincingly break and hold above the 1.4751/52 zone will call for lower prices towards its Jan 01'08 low/.618 Ret (1.4310-1.4921 rally) at 1.4577/45 initially and later at the 1.4446/45 zone, marking its .786 Ret/daily 100 ema followed by the 1.4310 level, its Dec 20'07 low .Further support levels are located at the 1.4278 area, its Sept 28'07 high and then the 1.4014/00 zone, its Oct 09'07 low/psycho level. On the whole, EUR continues to maintain its MT uptrend but requires a sustained invalidation of the 1.4751/52 area and the 1.4967 level to trigger that uptrend.
Support Comments 1.4577 Jan 01'08 low 1.4446/45 .786 Ret/daily 100 ema 1.4310 Dec 20'07 low 1.4278 Sept 28'07 high Resistance Comments 1.4751/52 Nov 09'07/Dec 11'07 Highs 1.4921 Jan 15'08 1.4967 2007 Peak 1.5000 Psycho Level

GBPUSD

GBP continues to strengthen its current recovery off its Jan 22'08 low at 1.9335 breaking through its solid resistance level at the 1.9653/23 area, its Aug 17'07 high/.50 Ret (1.8091-2.1160 rally)/Jun 08'07 low on Thursday and testing the top of its falling channel in early morning trading today. While another resistance stands at the 1.9879 area, its Sept 18'07 low, a breach of the mentioned channel top is required to put that level in danger of being tested. If that occurs and a successful turn above there materializes then a run at the 2.0000 level, representing its psycho level is likely. Daily RSI and Stochastics remain positive and continue to trend higher. Downside targets are seen at the 1.9753 level, its Dec 24'07 low followed by the 1.9653/23 area, which marks its Aug 17'07 high/.50 Ret (1.8091-2.1160 rally)/Jun 08'07 low ahead of the 1.9498/81 area, its weekly 100 ema/Jan 11'08 low and next the 1.9335 level, its Jan 21'08 low. All in all, the present upside recovery remains corrective of its medium term downside and the pair should head lower on completing the said correction.
Support Comments 1.9653/23 Aug 17'07 high/.50 Ret (1.8091-2.1160 rally)/Jun 08'07 low 1.9335 Jan 22'08 low 1.9498/81 Weekly 100 Ema/Jan 11'08 low 1.9271 .618 Ret Resistance Comments 1.9879 Sept 18'07 low 1.2000 Psycho Level 1.2094 Daily 200 ema