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US$ Falls Slightly Ahead of Fed Meeting

The US$ was modestly lower overnight ahead of the Federal Reserve decision later today. The Fed, which will release its decision on interest rates at 2:15 p.m. EST today, is expected to lower interest rates by 50 basis points. The accompanying statement will also be very important. With over a month and a half before the next regular meeting, the Fed is likely to state that the recent stimulus (potentially of 125 basis points) will be sufficient to counter current risks while supporting the overall economy. Investors have been worried that the recent news and speculation that Societe Generale's position mismanagement prompted the Fed's emergency rate cut will discourage the Fed from aggressively lowering interest rates. As for the US$, the larger cut in the near term followed by a neutral statement is likely to be overall supportive of the U.S. economy and the greenback. If the Fed lowers by the smaller 25 basis points, it might prompt a rally in the US$ today; however, it would likely mean that the Fed has some more easing to do this quarter. Yesterday, the S&PO/ CaseShiller home prices showed the largest ever drop, a 7.7% decline in home prices in November. That compared with a drop of 6.1% in October. However, that data was tempered by news that consumer confidence exceeded economists’ expectations, despite falling from the previous month. Today, ahead of the Fed meeting, there is the release of some significant economic data. The ADP employment number for the number of jobs created in December was released at 8:15 a.m. It was expected to show an increase of 40,000 jobs, but instead registered a much larger increase of 130,000. Additionally, GDP for the 4th quarter 2007 was released at 8:30 a.m, expected to show a gain of 1.2%. As we expected, GDP was released sub-1%, showing a 0.6% increase for the quarter. This economic data is likely to impact the market, as they will certainly help investors to finalize expectations for the Federal Reserve meeting later.

The US$ pared some losses against the euro following the encouraging ADP jobs report. The euro has been supported recently, rising to within 1% of its all-time high against the US$. The stance of the European Central Bank couldn't be a greater contrast than that of the Fed. ECB members have recently offered up different views on where the Bank would move policy, which created some angst in the market and caused the euro to stall. However, with ECB member Mersche’s comments that those who think the ECB will cut interest rates have “wishful thinking,” speculation has all but disappeared regarding a potential ECB rate cut.

The yen continues to trade in line with movements in equity markets. As markets have been supported in recent days, from the previous lows, the yen has also fallen versus the US$. Interest rates in Japan remain at historically low levels and will continue to support use of the carry trade when volatility declines. In the near term, however, we are likely to see gains against the yen tempered until economic growth begins to pick up toward the end of the first quarter. Given this, expect the yen to trade in whipping ranges ahead and after the Fed meeting.

Sterling rose slightly overnight as recent gains in stock prices have helped to spur some move back into the high-yielding currency. Additionally, overnight, the U.K. Treasury announced that both Governor Mervyn King and member Andrew Sentance will have their terms on the Bank of England extended beyond this year. These have been two of the most hawkish members of the BOE. Recently Governor Mervyn King stated that inflation in the U.K. might rise above 3% at some point this year. At the same time, Mr. Sentance stated that forecasts for excessive U.K. rate cuts are ignoring the upside risk to inflation. While the terms of these members were expected to extend, it has helped to support the pound overnight as forecasts for rate cuts are pared back.

Fed Meeting Tomorrow - Market Anticipating 50 bp Cut

The US$ traded in steady ranges overnight ahead of US economic releases today and as the Fed begins its two day policy meeting. With the market clearly focused on interest rate policy, traders have increased their bets that the Fed will slash rates an additional 50 basis points tomorrow, when the policy decision is announced. Futures markets now reflect an 86.0% chance that rates will be cut 50 basis points, with only a 14.0% probability assigned to a 25 basis point cut. Traders will also be closely monitoring the flow of US economic data slated for release this morning. At 8:30 a.m. Durable Goods orders are to be released expected to gain 1.6%. This release is followed by Consumer Confidence at 10:00 a.m., expected to register 87.0. After yesterday’s release of poor new home sales data, the market remains concerned about the prospect of the US economy moving closer to recession. This morning’s data will likely add further to these concerns, ultimately weighing on the US$.

The euro remains firm as traders anticipate further rate cuts from the Fed, while the ECB appears to maintain a policy of holding rates steady. Last week there were some rumors in the market that the ECB could move to lower rates as equity markets were weakening significantly. These rumors were quickly addressed by ECB officials who stressed that they remain committed to maintaining “price stability.” With the ECB more hawkish than some had forecast, the euro will likely continue to remain firm, pushing to new highs in the coming weeks.

The yen continues to trade in wide ranges as risk avoidance again takes center stage. With the yen remaining a significant barometer for market risk as measured by the use of the “carry trade,” the currency has enjoyed significant gains over the past several weeks. With an uncertain environment surrounding the outlook for the US economy, traders seem hesitant to enter positions in other markets financed with yen. Until stability returns to trade and a favorable outlook remerges for the US economy, expect the direction of the US$ yen pair to be dictated by the whims of traders and the volatility of equity markets.

The pound rose against the US$ overnight as traders focus on the wide interest rate differentials emerging between the US and the UK. With the Fed almost certain to cut rates 50 basis points tomorrow, an uncertain rate outlook remains in place in the UK. Economic indicators continue to remain mixed, as housing slumps and inflation accelerates, it still remains uncertain what policy direction the BOE will take when it meets next week. This uncertainty continues to bolster sterling.

Big Week for US$ - Will it Sink or Swim?

The US$ fell modestly overnight across the board ahead of US economic data slated for release later this morning and the Fed’s meeting on Wednesday. With traders focused squarely on the direction of US interest rates, speculation continued to mount about the policy position the US Central Bank takes when its meeting concludes on January 30th. Futures markets continue to gyrate over expectations about Fed policy, with traders now pricing in a 70.0% chance of a 50 basis point cut, with 30.0% odds wagered that rates would fall 25 basis points. With the markets continuing to reflect this uncertainty surrounding Fed policy, traders are looking to US data to help further define expectations. The US releases New Home Sales data this morning at 10:00 a.m. expected to register a decline of 0.9% to 645,000. Further weakness in housing should prompt the Fed to lower rates aggressively. Tomorrow sees the release of Durable Goods Orders and Consumer Confidence. Wednesday sees the release of 4th quarter GDP, Personal Consumption and the ADP Jobs report. On Thursday Personal income and Spending as well as Chicago PMI are to be released. On Friday, we get US jobs data for the month of January, expected to register a gain of 65,000 with unemployment holding steady at 5.0%. As weakness continues to permeate US economic releases, the market will expect an aggressive policy action from the Fed with a sharply worded statement. These expectations should keep the US$ under pressure for most of this week.

The euro gained overnight as traders focus solely on interest rate differentials between the US and Eurozone. With markets pricing in further rate cuts from the Fed later this week, all eyes have turned to the ECB and its policy stance. Recent comments from several ECB officials have signaled the Banks intention to hold rates steady or to hike further in the coming months. This policy position stems from the Bank’s intent to “maintain price stability” as it combats mounting inflation pressures in the Eurozone economies. This has led traders to purchase the Eurozone currency as the yield advantage favors investment. However, these euro gains could ultimately be limited as political pressure on the ECB appears to ratcheting upward. French Finance Minister Lagarde stated that he believes that the ECB “needs to be sensitive to comments throughout Europe (about the risk of slowing growth).” These pressures could force the ECB to refrain from further rate hikes as the Eurozone economies could soon begin to weaken significantly.

The yen rose overnight as traders again shun risk, prompted by declines in global equity markets. With the yen continuing to remain a barometer for market risk, traders buy and sell the currency as the course of global equity markets dictates. With an uncertain outlook defining global growth and Central Bank policy, expect the yen’s direction to continue to be defined by the uncertainty in global markets. The “carry trade” will remain the defining catalyst of the currency’s direction for some time.

The pound steadied overnight before gaining, after data was released in the UK, showing a decline in housing prices for the fourth consecutive month. This data coupled with comments from BOE policy maker Blanchflower has further added to market expectations about a UK rate cut at the February 7th meeting. Blanchflower stated that the BOE should aim “to get ahead of the curve,” as the economy slows. With expectations of interest rate cut building, expect sterling gains to be limited over the next week.

US$ Oscilates at Lower Levels - Fed Meeting Next Week Eyed

The US$ gained modestly overnight against the euro and yen, while falling against the pound as the market attempts to digest the news of this past week. The Federal Reserve slashed rates75 basis points in a surprise move on Tuesday, as the US Central Bank aimed to counter an apparent meltdown in global equity markets. However, it appears most of the equity selling on Monday and into Tuesday was prompted by news that a “rogue trader” had accumulated large losses in excess of $8 billion in options trading related to the direction of global equity markets. The equity sales that the market absorbed were related to Societe Generale, the employer of this trader, liquidating positions related to these equity option losses. It also appears that Eurozone officials failed to inform the Fed of the source of global equity sales, which might have forced the US Central Bank to act prematurely to cut rates. This view was quickly reflected in interest rate futures, which have now scaled back expectations for the pace of a Fed rate cuts next week. The market has now priced in a 52.0% probability that rates will drop 50 basis points, with a 48.0% chance assigned to the probability of a 25 basis point cut. These scaled back interest rate expectations have helped the US$ rally modestly. Also helping the US$ recover is the apparent stability that is returning to global equity markets. After the US government announced its “economic relief” package of $600 and $1,200 checks to be sent to each American family, markets appear to have settled. Expect trade to remain in volatile ranges as the US$ continues to look for new direction ahead of the Fed next week.

The euro fell overnight as news of the debacle at Societe Generale permeated markets and traders scaled back expectations of further steep rate cuts from the Fed. Adding to these euro negative events was news that the Italian government of Prodi was dissolved and new elections will be held. French banking giant Societe Generale reported losses of some $8.0 billion, as positions wee squared related to “rogue trades.” However, there has been some speculation in markets this morning that these liquidations were more sinister in intent and related to a CDO meltdown at the bank. Some believe that these exposures were previously unreported and squared on Monday, tied to irregularities at the Bank. If this is the case it could worry investors about other systemic problems in the European banking system. Further weighing on the euro, are the scaled back expectations around Fed policy next week. After Tuesday’s seeming premature rate cut, traders are scaling back expectations about further cuts, helping bolster the greenback. A final point weighing on the euro this morning is news that yet another Italian government has fallen. Political discord in the Eurozne’s third largest economy will likely continue to exert downward pressure on the currency. However, ultimate euro declines could be limited. ECB official Axel Weber reiterated his view this morning that Eurozone rates will remain steady or push higher in the coming months as the Bank aims to counter inflation pressures. These dueling sets of events will push the euro in opposing directions over the week increasing volatility.

The yen fell overnight as investors again tepidly reentered the “carry trade,” as equity markets appear to be recovering globally. Expect the yen’s fortunes to be tied to the overall direction of equity markets. As stocks rise, the yen will continue to fall, however as volatility reenters markets and traders shun risk, the “carry trade’ will unwind and the yen will strengthen. Expect these factors to keep the yen in wide trading ranges for some time.

The pound rallied overnight as traders focus exclusively on interest rate differentials. With the US Fed slashing rates earlier this week and likely to again lower rates next week, the markets’ focus has shifted to the Bank of England. The BOE’s policy stance remains uncertain as the economy slows, there seems to be some emerging inflation pressures. This could likely keep the Bank sidelined for some time, further increasing the allure of sterling deposits and boosting the pound.

US$ Weakens as ECB, Other Central Banks Will Not Follow Fed

The US$ weakened across the board overnight as traders remains focused on the probability of a continued US economic slowdown bordering on recession and the probability of further rate cuts from the Federal Reserve. On Tuesday the Fed surprised markets with an inter meeting 75 basis point rate cut, signaling their concern about a pronounced economic slowdown. Furthermore, futures markets have now priced in action from the US Central Bank when it meets next week. Markets are now predicting with a 96.0% chance probability that rates will drop 50 basis points, while assigning a 4.0% chance of a 25 basis point drop. With this backdrop of declining US rates, the US$ continues to come under significant pressure. At 8:30 a.m. the US releases Weekly Jobless Claims expected to register a gain to 320,000. At 10:00 Existing Home Sales are to be released expected to decline 1.0% to 4.95 million. Continued weakness in the housing sector coupled with an environment of lower US rates will certainly contribute to further US$ weakness.

The euro gained overnight as investors shift back into the Eurozone currency following comments from an ECB official and after the release of some better than expected data from Germany. Overnight ECB Council Member Axel Weber dismissed market speculation that the ECB would soon follow the Fed’s lead and slash interest rates. There had been some speculation that ECB would have to counter the Fed’s action with a similar cut as the Central Bank aimed to prevent further declines in equity markets. Weber, however, dismissed this speculation as “wishful thinking” and reasserted the Bank’s bias to maintaining price stability. Further helping the euro higher was the release of a better than expected Ifo survey of German business confidence. The survey unexpectedly rose to 103.4 in January from 103.0 in December, suggesting that the Eurozone’s largest economy could whether an economic slowdown in the US. With a robust economic seemingly still in place within the Eurozone and interest rates unlikely to shift lower anytime soon, the euro will likely continue to remain well supported.

The yen gained modestly overnight as the recent pattern of volatility in markets has led investors to decrease their appetite for risk and in turn the “carry trade.” With US equity markets swinging wildly over the past several trading sessions, the use of the “carry trade” has all but diminished from markets. As investors unwind this trade, yen strength ensues. It is likely that the yen will continue to trade in wide volatile ranges as investors continue to view the currency as a proxy fro investor risk and market volatility.

The pound gained overnight as traders continue to focus on divergent interest rate views between the US and UK. With the Fed slashing rates earlier this week and likely to cut again next week, there has been a significant widening of interest rate differentials between the two regions. This differential will likely remain in place for some time, as an uncertain economic and inflation output in the UK, will likely keep the Bank of England sidelined for some time. This rate environment will likely keep the pound well supported for the next several weeks until the BOE meets in early February.

Markets Want More Cuts, Will Fed Deliver?

The US$ rallied overnight against the euro and pound, while falling against the yen as a meltdown in global equity markets appears to be ensuing. Fears about an impending US recession have led European bourses significantly lower this morning with London’s FTSE down 3.0%, France’s CAC 40 down 4.4% and Germany’s DAX down 4.8%. Equal losses are to be expected this morning when Wall Street opens; with S&P futures registering a 36-point drop pointing to a rout of some 250 points with the Dow Jones Industrials begin to trade. Yesterday, the Fed responded to these market fears about an impending US recession with a surprise rate cut of 75 basis points prior to next week’s meting. As this cut had been priced in, markets had little reaction but it now creates expanded expectations of further Fed activity when the Bank meets next week. Currently the market is expecting some policy shift from the Fed, although the course if this policy is facing widely divergent expectations. Fed Funds futures markets are pricing in a 54.0% probability of a 50 basis point rate cut, and a 46.0% probability of a 25 basis point cut. Clearly this data reflects the inconsistent message the Fed is sending to markets and in turn volatility continues to reign. As recession fears mount, the US released data pointing to further declines in housing markets as mortgage applications registered and 8.3% gain vs. a 24.3% gain last month. Also likely to weigh on the greenback over the next few months were comments overnight from financier George Soros. Soros, who made his fortunes speculating against the pound sterling, stated that he believes that the US$ will lose its presence in the world economy as global investors will shun US$ savings as concerns mount that a significant fallout will result from the sub prime crisis.

The euro fell overnight as concerns mount that the Eurozone economies could soon begin to stumble, inhibiting the ability of the ECB to hike rates throughout this year. Futures markets have significantly eased expectations about the probability of an ECB policy shift, as a slowdown seems almost certain to ensue. However, ECB Chief Trichet seems to be dampening some of these expectations about a shift lower in Eurozone rates. Despite the seeming collapse in Eurozone equity markets, ECB Trichet has stated that he remains committed to fighting inflation. Expect these dueling expectations to keep the euro in wide volatile ranges for some time to come.

The yen surged to 2 ½ year highs against the US$ this morning as the remnants of the “carry trade” are being liquidated. With recent gains in global equity markets financed through shorting the yen in a low yielding “carry trade,” this morning’s meltdown in equity markets has led to a squaring in these positions. The market’s apparent risk aversion as reflected in this equity market meltdown, has led traders to square yen positions. Expect this pattern of trade for the yen to persist for some time, as it’s fortunes today will likely be closely tied to the direction of US equities.

The pound has come under pressure this morning following the release of a report in the UK showing that GDP expanded at the slowest pace in more than a year in the fourth quarter. With the market already concerned about the prospect of a global recession, this morning’s report further fuels expectations that the Bank of England will soon be forced to lower rates. These rate expectations will continue to weigh on sterling and limit the ultimate upside for the pound.

Bernanke Yields to Market, Cuts Rates in Emergency 75 Basis Point Move

The US$ has traded in volatile ranges this morning as the market braced itself for a significantly weakened open as a rout in global equity markets was ensuing. S&P futures had registered a 60 point decline with the Dow Jones Industrials pointing to a drop of over 500 points as markets shed equity positions amidst a growing concern about the outlook for global economic growth. These losses in US equity markets were prompted by a significant meltdown in global equity markets with both European and Asian bourses registering declines in excess of 7.0%. These concerns about further declines in equity positions were addressed by the Fed this morning as it surprised the market with an immediate 75 basis point rate cut. The Fed took this action citing weakening US economic conditions amidst continued declines in US financial markets. Despite this inter meeting rate cut, traders have priced in the probability of further rate cuts at the Bank’s January 30th meeting. Currently, the market has priced in a 70.0% chance of a 25 basis point cut next week. Equity markets will likely continue to remain the focus of traders today, as the focus remains on the outlook for global growth. There is limited data slated for release this week with nothing of significant importance until Friday when the US releases existing home sales data. This release is expected to reveal that sales fell some 1.0%, as weakness in the sector continues to dominate.

The US$ has traded in wildly exaggerated ranges against the euro in the last 24 hours as dueling interest rate views helped steer trade. Overnight speculation mounted that the ECB would be forced to refrain pushing rates higher at any time in the near future as a slowing global economy forces the Bank to refrain from further rate hikes despite mounting inflation pressures. However, any gains the US$ enjoyed from this revised Eurozone rate outlook was quickly dispensed as the Feds surprised markets with a 75 basis point rate cut, a week prior to its scheduled meeting. Expect volatility to pervade markets this week as traders remain intently focused on shifting interest rate views and massive declines in equity markets amidst a significant slowdown in global growth prospects as the US economy spirals towards recession.

The yen also traded in wide looping ranges as traded has been defined by interest rate outlooks and a shift from the market away from risk. Initially the yen firmed overnight as traders shed equity positions amidst signs of a significant rout in global equity markets. With traders shunning risk, the yen typically gains as traders unwind positions funded with short yen financed positions. However, these yen gains were quickly dispatched following the surprise decision by the Fed to cut rates. This market viewed this environment of lower rates as a strong impetus that could eventually jumpstart US economic growth, leading to some modest yen declines. Expect volatility to continue to dominate trade today with an overall market view to a higher yen as risk aversion prevails.

The pound gained this morning following the surprise rate cut decision by the Fed. As traders remain focused on diverging interest rate outlooks, sterling benefited from the immediacy of this morning’s cut as the rate outlook in the UK still remains uncertain given a declining housing market and incrase4d interest arte expectations. Expect this volatility to pervade markets for some time.

Bernanke Testimony Big Disappointment, US$ Flat

The US$ was mixed overnight, gaining against the British pound and yen while falling slightly against the euro. The recent strength of the US$ comes even as the market receives mixed messages from Federal Reserve Chairman Ben Bernanke. The clumsy testimony that the Chairman gave yesterday created ripples through equity markets, causing a massive sell-off. The Chairman has refused to confirm market expectations that the Fed will cut interest rates more aggressive than they might want to. The near-term problem experienced is that expectations for lower interest rates in the immediate future will cause economic activity to slow now, as investors wait for lower rates. This will depress the U.S. economy further and cause the need for more cuts. Therefore, if the Federal Reserve judges that interest rates need to move 100 basis points lower to spur growth, it is better for those moves to come immediately, rather than in the future. Bernanke and his colleagues on the Federal Reserve do not realize this, or are refusing to communicate their understanding to the market clearly. Their inept handing of interest rate policy has the potential to create lasting negative effects on the US$. The longer that the U.S. economy has negative data, accompanied by expectations that interest rates will be cut, the more difficult it becomes for the US$ to recover from these historic lows. In addition to the monetary policy, it is becoming ever more evident that the government will step in to provide a fiscal stimulus to the economy. President George W. Bush will release his economic stimulus plan today, while it is likely that the Democratically controlled U.S. Congress will adjust it slightly. The stimulus is likely to be narrowly targeted and provide little more than a morale boost to the actual economy.

The euro remains in volatile ranges, as market liquidity appears to be thin. The recent comments by ECB member Mersch have created the need for the market to reassess future interest rate policy in the Eurozone. While ECB President Trichet has consistently stated that the ECB’s bias is to move interest rates higher, ignoring the possible negative consequence on growth, this new evidence suggests that the ECB might be leaning toward allowing near-term inflation to persist for a longer period than their strict mandate would dictate. However, even if the ECB is changing its bias from raising rates to more neutral, the continued stance of the Federal Reserve to cut interest rates will keep the euro supported.

The yen and the U.S. equity markets continues to move in tight correlation, though the market is beginning to be concerned that the Japanese government or Bank of Japan will intervene to weaken the currency. Overnight, data in Japan showed that consumer confidence moved slightly lower at the same time that department store sales declined form the previous month’s reading. In the long term, the market is still looking for global economic stability to return to the market. If this returns, it is likely that the yen will also return to its weak state. Despite the fact that interest rate differentials have narrowed significantly, the carry trade will be very lucrative, particularly against the commodity currencies, if stability arises.

Sterling fell sharply overnight as it continues to move in line with expectations on whether the Bank of England will have to move interest rates lower. Overnight, it was released that retail sales fell 0.4% in December, compared with expectations that they would rise 0.2%. It is likely that the market will pay particular attention to the release of January house prices on Sunday. The status of the U.K. economy, which has relied on the housing sector for its strength, is likely to be shown here first.

US$ Awaits Chairman Bernanke Testimony at 10:00 a.m. EST

The US$ appeared to diverge in direction overnight, consolidating yesterdays’ gains against the euro, while holding steady against the pound and dropping against the yen. With several different pieces of news in the market pulling trade in divergent directions, the markets seems very unsure. Overnight US investment banking giant Merrill Lynch announced that it would be posting its largest quarterly loss ever as they seemingly wrote down all existing under performing sub-prime loans. This is the second straight quarterly loss for the banking giant as some $10.0 billion in quarterly losses were reported as the result of $11.5 billion in write downs. With this huge write off overhanging the market, traders are now turning their attention to the Fed and what policy position the Bank will take at its January 30th meeting. Currently, future markets are pricing in a 70.0% chance of a 50 basis point cut with a 30.0% probability assigned to a 75 basis point cut. With the Fed failing to clearly signal its intent surrounding interest rate action at its next meeting, futures markets continue to gyrate wildly. Hopefully, Fed Chief Bernanke will be able to shed some light on Fed policy initiatives when he testifies before Congress at 10:00 a.m. Further weighing on the importance of Bernanke’s testimony is the developing view that the US economy is rapidly tumbling towards recession. Earlier this morning the US released Housing starts data registering a gain of 1.006, million falling 14.2% and dropping to the lowest level since 1991. Jobless claims held steady at 301,000 however, they will likely have little impact, as the market believes unemployment rates continue to gain. The markets’ focus today will almost certainly be on Bernanke, who needs to project a strong appearance of leadership in these stark economic times. Any failure to project the view will likely lead to further US$ declines.

The euro traded in wide ranges overnight as traders continue to adjust positions amidst uncertainty in overall markets. Rumors continue to dominate trade that there was some Central Bank selling of euros at levels around the historical highs, as Eurozone leaders continue to express their dismay at the currency’s climb. With apparent interest to sell the euro above the market, it is very likely that the euro will soon settle into new ranges at these lower levels. Adding to the euro’s declines yesterday, were comments from French ECB official Yves Mersch that he believes that the Eurozone economies could come under duress later this year. These comments helped ease some of the markets’ expectations about the probability of further rate hikes from the ECB. However, ECB Chief Trichet ultimately dismissed these comments by stating that the Bank’s mandate remains closely bound to “price stability,” keeping the prospect of further shifts in rate policy abound. With an uncertain outlook now creeping into market’s surrounding Eurozone policy, traders are opting to square positions. Expect this skittish trade to dominate for some time.

The yen continues to gyrate in wide looping ranges as traders use the Japanese currency as a proxy for risk. With choppy trade dominating not only currency markets, but also equity and commodity markets, the “carry trade” is ultimately shifted in and out on a regular basis. Expect the yen’s fortunes to be tied to this mix of volatility and risk adoption and avoidance. It is likely that the Japanese currency will remain a proxy for market risk for some time, prompting continued wide volatile ranges in the currency.

The pound continues to trade in wide ranges as well as the market also remains uncertain about the overall economic and interest rate outlook in the UK. Recent data releases have painted a mixed picture of UK economic growth, with housing seemingly rebounding as consumer spending slows. This has projected an uncertain rate outlook for the Bank of England as it struggles to contain inflation pressures while promoting growth. Expect these competing views to lead sterling to trade in wide ranges for some time.

Producer Prices, Retail Sales Hurt Greenback

The US$ continues to remain under pressure, weakening against the yen and sterling overnight, while continuing to trade within 1.0% of the all-time euro low. With the market focused on a slowing US economy and any action the US Fed takes at its next meeting, traders continue to sell the greenback. Markets continue to bet on the probability of aggressive Fed action at the January 29th meeting, with a 54.0% probability assigned to a 50 basis point cut and now a 46.0% chance assigned to a 75 basis point cut. The odds of an aggressive 75 basis point cut seem to increase on an almost daily basis. Adding to investor anxiety is the continued fallout from sub prime mortgage defaults. Citigroup, the largest US bank by assets, posted it largest loss in its 196-year history, writing off some $18 billion in non-performing loans. In addition, Merrill Lynch announced that it might post a $3.23 billion loss in the fourth quarter topping the loss of $2.24 billion in the third quarter. With these substantial losses mounting in the financial sector, it is likely that we will see continued capital flow from sovereign growth funds into the US financial sector. With anxiety already high about perspective defaults in the financial sector, the US releases several pieces of data this morning. PPI is to be released at 8:30 expected to gain 0.2%. In addition, retail sales are to be released expected to register no gain. Expect this data to remain weak, further reinforcing the already disappointing outlook for US growth.

The euro continues to remain firm, trading about a 0.5% from the all-time highs against the US$ as the common currency continues to surge as it adopts its position as a safe-haven alternative to the US$. As interest rate differentials continue to drive trade, expectations of steep Fed rate cuts contrasted with an ECB that remains on hold, will continue to bolster the common currency. This view clearly continues to drive trade despite the release of some weak data from the Eurozone. The Zew Center for European Economic Research released a report showing that German investor confidence fell to 37.2 in December from 41.6 in November. A strong euro and concerns about a global slowdown continues to weaken confidence within the Eurozone, however, investors still seem to prefer the common currency as an alternative to the greenback.

The yen surged this morning and overnight as investor anxiety continues to steer trade in the Japanese currency. Mounting concerns about the extent of the sub-prime fallout coupled with the fact that the US Fed will aggressively slash rates, has led investors to curb riskier positions. This risk adversity has led investors to shed positions funded with the yen through the “carry trade.” Expect investor anxiety to continue to prompt the yen’s surge as global equity market’s slump and investor’s avoid risk.

The pound gained overnight following the release of data showing that UK inflation pressures remain robust, forcing investors to scale back some expectations about the scope of further Bank of England rate cuts. UK inflation registered above 2.0% for a third consecutive month, reducing expectations that the Central Bank would soon undertake an aggressive plan of rate cuts. With uncertainty now emerging surrounding the scope and scale of rate cuts from the BOE, investors have squared short sterling positions.