Euro Trades Cautiously Ahead of ECB

Top Stories

• Greeks 300M away from meeting austerity requests
• UK Data continues upside surprises ahead of BOE
• Nikkei off -0.15% Europe up 0.61%
• Oil at $99.33/bll
• Gold at $1739/oz.

Overnight Eco

• JPY Machine Orders (MoM) (DEC) -7.1% vs. -4.8%
• NZD Unemployment Rate (4Q) 6.3% vs. 6.5%
• NZD Employment Change (QoQ) (4Q) 0.1% vs. 0.4%
• CHF SECO Consumer Confidence (JAN) -19 vs. -23
• GBP Visible Trade Balance (Pounds) (DEC) -7.1B vs. -8.5B
• GBP Manufacturing Production (MoM) (DEC) 1.0% vs. 0.3%
• GBP Industrial Production (MoM) (DEC) 0.5% vs. 0.3%
• GBP NIESR Gross Domestic Product Estimate (JAN) n/a

Event Risk on Tap

• USD Initial Jobless Claims (FEB 4)
• USD Continuing Claims (JAN 28)
• USD Wholesale Inventories (DEC) expected at 0.5%
• CAD New Housing Price Index (MoM) (Dec)

Price Action

• USD/JPY capped at 77.25
• AUD/USD rallies back to 1.0800 post selloff on CNY CPI
• GBP/USD better data boosts to 1.5850
• EUR/USD 1.3300 taken out but stalls ahead of ECB

Euro hit yet another fresh yearly high in late Asian trade today, but stalled at the 1.3300 level in morning European trade as markets awaited the ECB press conference scheduled for 13:30 GMT. Earlier, the pair tumbled to 1.3215 on headline news that Greek negotiations reached an impasse, but sentiment improved when it was revealed that Greek authorities are within 300M of reaching the austerity target cuts required by the Troika of creditors.

The office of Prime Minister Papademous issued a statement saying that  the leaders of the three parties supporting the government “agreed on all the points of the program with the exception of one which requires further elaboration and discussion”. The final issue revolves around the matter of supplementary pension payments, but it appears as though all parties are moving inexorably towards some sort of a deal before the February 13th deadline.

The currency market continues to trade as though an agreement will be reached avoiding the prospect of hard default by Greece and the possible contagion that such a scenario would entail. Today’s ECB press conference may provide further insight into the role of the central bank with respect to the bailout and could create further volatility in the pair.

However, looking past Greece the key issue for the market to consider will be the LTRO plans by the ECB. If ECB  President Draghi indicates that the central bank will provide unlimited liquidity on an open ended time horizon, the euro could come under pressure as traders consider the balance sheet risks resulting form such aggressively accommodative monetary policy. The markets already expect a takeup of more than 1 Trillion euros at the next LTRO this month which would expand the ECB’s balance sheet significantly. 

In the near term the positive resolution of the Greek bailout package may provide further lift to the EUR/USD with 1.3400-1.3500 zone in view. On a longer term horizon, however, the pair is unlikely to rally much beyond those levels as markets consider the credit risk assumed by the ECB.

Meanwhile, as traders continue to focus almost exclusively on Europe, news from China suggests that the country economy may see more headwinds than previously thought. Latest CPI data indicated that prices rose by 4.5% far hotter than 4.0% eyed, diminishing the prospect of further reduction in RRR by the PBOC. More troubling still is the latest anecdotal evidence from China which showed that electricity fell by 7.5% in January while new car sales fell by the most in 7 years. Such sharp drop in demand does not bode well for Chinese growth this year and puts the AUD/USD rally in jeopardy. The pair had a very powerful move over the past month, but may  now stall at the 1,0800 level if markets begin to price in a slowdown in Chinese GDP. 

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