Euro Pivoting Again?

EURUSD and EURGBP have so far reversed after trying to break through
key resistance levels. Elsewhere, the Aussie and risk appetite are
stumbling after China moved to tighten credit once again and ahead of
expectations.

*China tightens, risk swoons...*
China announced that it will hike the RRR another 50 basis points as
of January 20. Obviously, the rate of inflation and credit growth are
unnerving the regime. Further interest rate hikes are likely to
follow, though China is reluctant to go that route because of the
implications for hot money flows (because of higher yield, etc.)
The move by China saw EM currencies and equity markets weaker
overnight, tacking on to yesterday's stumble in some of these trades.
A look around the world shows an awful lot more worry in major EM
equity markets than we are seeing, for example, in the US. This
divergence is important for the trajectory in risk appetite, which so
far has held up remarkably well. The proxy for further worry appears
to be the Aussie at the moment, which remains rather weak versus the
market. Imagine if we get a real correction in the major developed
equity markets. An outfit called Sentiment Trader yesterday claimed
that the S&P500 has closed above its 10-day moving average for 30
consecutive days for the first time in its 82-year history. A new
standard for the term overbought? The risk outlook is key here as we
navigate earnings season, which has so far seen mostly favorable
results, particularly from Intel, which reported strong earnings and a
strong outlook.

*Chart: EURGBP*
The squeeze on Euro positions after Trichet's rather hawkish tirade on
inflation (apparently the market taking Trichet at face value - after
all, he did hike in July 2008 when markets were coming apart at the
seams) saw a further spike today into key resistance areas in EURUSD
and EURGBP. In the latter's case, the 200-day moving average at around
0.8480 has so far held and this sets up an important technical area
for fresh bearish positions. In EURUSD, a similar area is the 1.3435
area. If we close above these areas, then the bearish outlook would be
neutralized.

*US Data*
The retail sales data is rather weak compared to what many said was a
strong holiday shopping season in the US, with ex Auto and Gas data
coming in at a +0.4% MoM rate. Combined with the -0.2% downward
revision to the November data, this was actually slightly below modest
expectations.

The CPI data was largely in-line. It's not a huge surprise to see the
sharp increase in the headline data considering the acceleration in
energy and food prices in the last couple of months of last year. The
core data remains muted.
The December industrial production figures look strong on the surface,
but much of this is apparently due to increase in energy-related
production and utilities - the devil is always in the details.

*Looking ahead*
Looking ahead, the key guidance for the market will come from
corporate earnings and the equity and risk markets' reaction to them
as well as any further developments in China. Today's close is rather
important for EUR crosses, which have had quite a bullish week, though
as we note above, the critical areas of the EURGBP and EURUSD charts
have yet to be breeched (and watch EURCHF as one of the main proxies
for overall EUR direction).

We note the precious metal tumble with intense interest - is the
weakness there a sign for the more trust in "the system" and fiat
currencies or simply shifting sentiment on commodities or is it just
the result of a nasty squeeze in EUR/precious metals positions? The
plot thickens and we suspect that volatility is likely to remain high
in coming weeks considering the interesting divergences across
markets.
Stay careful out there and have a wonderful weekend.

*Economic Data Highlights*
* Japan Dec. Domestic CGPI out at +0.4% MoM and +1.2% YoY vs.
+0.2%/+1.0% expected, respectively and vs. +0.9% YoY in Nov.
* China Nov. Leading Index rose +0.5% MoM
* Switzerland Dec. Producer and Import Prices rose +0.3% MoM and
+0.3% YoY vs. +0.1%/+0.3% expected, respectively and vs. +0.1% YoY
in Nov.
* UK Dec. PPI Input rose +3.4% MoM and +12.5% YoY vs. +1.7%/+10.2%
expected, respectively and vs. +9.2% YoY in Nov.
* UK Dec. PPI Output rose +0.5% MoM and +4.2% YoY vs. +0.4%/+3.9%
expected, respectively and vs. +4.1% YoY in Nov.
* UK Dec. PPI Output core rose +0.2% MoM and +2.9% YoY vs.
+0.3%/+3.0% expected, respectively and vs. +3.3% in Nov.
* EuroZone Dec. CPI out at +0.6% MoM and +2.2% YoY as expected and
vs. 1.9% YoY in Nov.
* EuroZone Dec. Core CPI out at +1.1% as expected and vs. +1.1% YoY
in Nov.
* EuroZone Nov. Trade Balance out at -1.9B vs. +1.7B expected and
+3.5B in Oct.
* US Dec. Consumer Price Index out at +0.5% MoM and +1.5% YoY vs.
+0.4%/+1.3% expected, respectively and vs. 1.1% YoY in Nov.
* US Dec. CPI ex Food and Energy rose +0.1% MoM and +0.8% YoY vs.
+0.1%/+0.7% expected, respectively and vs. +0.8% in Nov.
* US Dec. Advance Retail Sales rose +0.6% MoM vs. +0.8% expected

US Dec. Advance Retail Sales ex Autos and Gas rose +0.4% MoM vs.
+0.3% expected (Nov. data revised down to +0.6% vs. +0.8 original
estimate
US Dec. Industrial Production rose +0.8% MoM vs. +0.5% expected
US Dec. Capacity Utilization rose to 76.0% vs. 75.6% expected ad
75.2% in Nov.
*Upcoming Economic Data Highlights (all times GMT)*
* US Jan. Preliminary University of Michigan Confidence (1455)
* US Nov. Business Inventories (1500)
* US Fed's Lacker to Speak (1745)
* US Fed's Rosengren to Speak (1815)
* New Zealand Dec. REINZ Housing Price Index (Sun 2100)
* UK Jan. Rightmove House Prices (Mon 0001)
* Australia Dec. New Motor Vehicle Sales (Mon 0030)
* Japan Dec. Consumer Confidence (Mon 0500)
Source: ActionForex.Com