Yesterday's Sharp Moves Extend In Today's Trading

EUR CPI Cools More Than Expected, Services Activity Matches Preliminary

The flash estimate of European consumer prices took another sharp turn downwards in December. The annual rate cooled to 1.6% from 2.1% in November, the lowest level the annual rate has been in more than two years. It's the first time the annual rate moved below the ECB's 2% ceiling for the first item since August 2007. The fall in inflation gives the ECB more leeway to move on interest rates as policy makers brace for more negative news from the economy. The final version of activity in the services sector remained close to its preliminary release. It's the seventh month in a row that the sector, along with manufacturing, has contracted. In November the index was at 42.5. Compared to the middle of December when the preliminary release was revealed, expectations have shifted on how aggressive the ECB will be going forward. Where before expectations were for perhaps a one-and-done approach now traders are seeing a shift towards more cuts.

EUR/USD - Euro Slides 300 Pips vs Dollar

The Euro continued falling against the Dollar, sliding another 300 pips to test the level around 1.33. That put the pair about 600 pips lower than where we started the week as traders price in a more aggressive ECB. The euro managed to recover some of its losses in the NY session as US data was weak, giving the downtrend a chance to retract about 50% of its fall.

UK Services Contraction Slows While Consumer Confidence Hits New Low

UK services contracted at close to the fastest pace in at least a dozen years as the PMI index edged up just slightly to 40.2 in December from 40.1 in November. Levels below 50 indicate contraction. In a silver lining to the data, expectations were for an deeper contraction in the sector, so though its too early to tell, the data may suggest the pace of decline may have stabilized. That would be the first sign of a bottom. A second release today showed consumer confidence hitting a new low

UK Nationwide Housing Prices Fall 2.5%

UK housing prices fell at a record rate in December, at least for this series which goes back to 1991. Prices plunged 2.5% on the month, a sharper decline that was anticipated which follows a more tepid decline in November. The annual rate was down almost 16%. The Bank of England meets this week and will continue to cut interest rates in order to stimulate the struggling British economy while the government will introduce new measures to try and increase bank lending.

EUR/GBP - Euro Slides vs Pound for Second Straight Session

The Euro-Pound also fell heavily for a second straight session, as the luster behind the Euro is being sapped away. The pair fell 270 pips to the 0.9020 area, where it found some support. Last Friday we saw the uptrend trendline broken, and we have had significant follow-through. We will show you how the Pound fared against the dollar after we present today's US fundamental data.

US ISM Non-Manufacturing Improves from December

The index that measures the US services sector surprised forecasts and improved in December, climbing to 40.6 from 37.3. Though a measure below 50 still means contraction in the sector, it does suggest the pace of contraction is slowing, the first sign needed to see some stabilization. The sub-gauges for business activity, new orders, and employment showed some improvement, while the prices index hit its lowest level since the series was introduced in 1997.

US Pending Orders Drop 4%

Pending home sales, a gauge used to help predict future home-sales activity saw a steep drop of 4% in November, blowing away forecasts estimates of a 0.9% decline. Also, October's data was revised sharply down to show a from the original 0.7%. That put the overall index at its lowest level since the data series began in 2001.

US Factory Orders Plunge in November

Factory orders plunged in November, declining 4.6% on the month, almost double the fall expected by economists. In October orders were down 6%, and its the fourth month in a row that orders have declined.

GBP/USD - Pound Climbs 500 Pips to an Intra-day High of 1.4960

Yesterday we saw the Pound-Dollar climbing from its support near 1.4450. In overnight trading the Pound gave up most of its gains, testing 1.45 for a brief moment before roaring to a 475 pip move in NY trading. That brought the pair to an intra-day high of 1.4960.

USD/JPY - Dollar Rallies in Overnight Trading to 94.60

For a second session in a row the Dollar-Yen rallied in European trading, climbing 150 pips to set an intra-day high at 94.60. In early NY morning trading the Dollar retraced about two-thirds of its climb. Stocks were up in the US, despite the weak US data. Policy makers saw "substantial" risks to the slumping economy which justified them cutting rates to a record low while also pledging to expand emergency loans which would show up on the central banks balance sheet. Officials believe "the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial" with the "distinct possibility of a prolonged recession."

USD/CAD - Loonie Continues Gaining on Dollar on Oil Reaching $50

Just like in our previous pairs, the US Dollar-Canadian Dollar extended its move from yesterday after a correction to start the session. The pair fell to 1.1760 following the US fundamental news, which establishes a downward range for this pair. Today's low was the lowest this pair has been since the beginning of November. Just like yesterday higher oil prices were a catalyst for the Loonie's gains as oil rose above $50 a barrel before retreating.

Upcoming Releases

Tonight new Zealand will release its trade balance and the commodity price index, while Australia posts retail sales and new home sales.
Overnight we get unemployment data from Germany and PPI data from the Euro-zone. Tomorrow, there just one major release, the ADP employment change

written by Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com