FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
With much of Asia still on holiday, FX price action was largely subdued overnight. However, AUDUSD did receive a strong boost when the RBA kept the forecasts for 2011 and 2012 inflation unchanged, despite the flooding. EURUSD traded 1.3609-1.3652, USDJPY 81.45-81.70. Fed Chairman Bernanke’s economic assessment largely echoed the latest FOMC statement. The Nikkei-225 is up just over 1% at the time of writing.
US data supported our analysts’ call for faster Q1 growth as non-manufacturing ISM surged to the highest level since 2005, and was well above expectations. We continue to expect real GDP growth in the current Q1 to accelerate to 4.2% from 3.2% in Q4 despite the unusually inclement weather that is temporarily delaying/postponing some economic activity. New jobless claims fell slightly more than anticipated to 415k. Wintry weather has resulted in unusually choppy data in January and we expect the weather to also affect the January payrolls. Our US economists forecast a +80k rise in headline payrolls, well below the consensus of +143k.
EUR
The messages conveyed by European Central Bank President Trichet at the Feb. 3 press conference were pretty much the same as those of the Jan. 13 press conference. However, what the FX market was inclined to hear and how it interpreted Trichet on each occasion made all the difference to the euro. Going into last month’s meeting the market expected nothing new and heard hawkishness. EURUSD popped. This time the market expected hawkishness and heard nothing new. EURUSD dropped. Like last month, Trichet put inflation front and center in his remarks. But while he again noted evidence of short-term upward pressure, mostly because of energy prices, he qualified this by saying that the current situation didn’t appear to pose any danger to price stability over the medium term. He then emphasized that it’s the immediate term that counts. There were no hints of dovishness but certainly not enough hawkishness to meet market expectations.
German Chancellor Merkel said there will be no concrete decisions at the upcoming EU summit though she did say the Eurozone has to take important steps by the end of March on stability, growth and competitiveness because if the euro fails, Europe fails.
Services PMIs were mixed. Germany’s reading rose to 60.3 from December, close to all time highs, and the French print rose to 57.8. However, peripheral readings are stabilizing but remain far from the levels of the Eurozone core. Eurozone retail sales declined unexpectedly by 0.6% m/m, but this could have resulted from poor weather.
GBP
Sterling was supported by the Services PMI which came in above consensus at 54.50, and rose substantially from the prior reading of 49.7.
CHF
Our analysts pushed back their SNB policy rate move forecast to June, from March. Although the latest Swiss economic indicators have been anything but disastrous, Swiss franc strength has weighed on officials. The SNB has kept policy expansive as judged by lower short-term rates. Our main scenario now calls for a an increase in the SNB’s 3m CHF Libor target by 25bp to 50bp at the June MPA.
AUD
The RBA’s Statement on Monetary Policy concluded that the economic impact of the floods would be temporary, echoing comments made in Tuesday’s policy statement. The 2010 GDP forecast was revised down to 2.75% from the previous estimate of 3.5%, but the 2011 GDP forecast was raised to 4.25% from 3.75% previously. No change was made to the 2011 or 2012 forecasts for core inflation.
CAD
Our Canadian economists expect a modest net increase in employment of 10.0k (consensus 15.0k). Canadian Finance Minister Flaherty has already warned of potential challenges regarding jobless numbers, which seems to support our below-consensus forecast.
TECHNICAL OUTLOOK
EURUSD stalls in front of 1.3888/1.3948.
EURUSD BULLISH Stalled in front of 1.3888/1.3948 resistance zone. Initial support lies at 1.3571.
USDJPY BEARISH Support lies at 81.31, break below this would expose 80.93 next. Resistance at 82.15.
GBPUSD BULLISH Focus is on 1.6299 key high with scope for 1.6379 next. Support lies at 1.6010.
USDCHF BEARISH While initial resistance is at 0.9526, focus is on 0.9329/01 support zone.
AUDUSD BULLISH Breach of 1.0149 has put focus on key resistance 1.0256 next. Support lies at 1.0083 yesterday’s low.
USDCAD BEARISH Momentum is negative; break of 0.9861/38 support area would expose 0.9820. Near term resistance at 0.9978.
EURCHF BULLISH Rise through 1.3002 has exposed 1.3069 ahead of 1.3118. Support at 1.2781.
EURGBP NEUTRAL Sharp fall through 0.8510 puts pressure on 0.8433, break of this would expose 0.8413 next. On the upside initial resistance is defined at 0.8533.
EURJPY NEUTRAL Decline through 111.28 has turned the model to neutral; 112.92 and 110.32 mark the near term directional triggers.
SCHEDULE
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