Expert Analysis of Today's Market

• The dollar rallied against the pound and euro after the European interest-rate decisions on Thursday. The Bank of England lowered its key interest rate by a quarter-point to 5.25% as expected. The European Central Bank left its key interest rate unchanged at 4% as forecast but sounded more dovish than expected. The dollar was also supported by a rumor that the big drop in ISM non-manufacturing data was possibly due to a miscalculation. The yen and carry trades continue to trade inversely to US stocks. The USD/JPY is testing the 107.50-area resistance at the same time as US equities are at important support.


• The EUR/USD broke important support after ECB President Jean-Claude Trichet said the "risks surrounding the economic outlook lie on the downside." Despite the ECB sole mandate of price control, the ECB will have to cut rates and Trichet's statement today is preparing the market for lower rates. There are resistance in the 1.45-1.46 area and strong support in the 1.43-area.

Financial and Economic News and Comments

US & Canada

• US initial jobless claims fell a less-than-expected 22,000 to 356,000 in the week ended February 2, from a two-year high of 378,000 a week earlier, the Labor Department said.. The four-week average of new claims rose by 8,500 to 335,000. Continuing claims jumped by 75,000 to 2,785,000, the highest since 2005. Overall, the labor market situation is deteriorating.

• US pending home sales fell 1.5% m/m in December following a revised 3% m/m decline in November, the National Association of Realtors said. This indicates further weakness in the housing market.

Europe

• The Bank of England cut its key lending rate by a quarter-point to 5.25% as expected, saying "prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued." However, the BOE asserted upside risks to inflation remain. "The committee needs to balance the risk that a sharp slowing in activity pulls inflation below the target in the medium term against the risk that elevated inflation expectations keep inflation above target," the BOE said.


• The European Central Bank left its key interest rate unchanged at 4% as expected. However, at the following press conference, ECB President Jean-Claude Trichet signaled that risks to EMU economic growth are increasing. "As the reappraisal of risk in financial markets continues, there remains unusually high uncertainty about its overall impact on the real economy....We will continue to monitor very closely all developments over the coming weeks," Trichet said.


• German manufacturing orders fell 1.7% m/m in December following a 3.0% m/m gain in November, the Economy Ministry said. Orders rose 5.6% y/y in December. German domestic orders fell 0.5% m/m in December and export sales declined 2.8% m/m.

• UK manufacturing output unexpectedly fell 0.2% m/m in December and was unchanged compared to a year ago, the Office for National Statistics said.

Asia-Pacific

• Bank of Japan Deputy Governor Kazumasa Iwata said: “Consumer spending is solid, even though consumer confidence has deteriorated considerably.” He also said persistent financial-market turmoil is a risk to the global economy.

FX Strategy Update