Euro Recovery Losing Steam

Euro is feeling some resistance against dollar at around 1.28 level as risk rally loses steam. Markets reaction to S&P's downgrade was so far limited, which reflected in successful bill auctions in Eurozone. But the current recovery in Euro is mainly seen as short squeezes following the pre-downgrade selloff. The common currency's down trends against dollar, yen, aussie and even sterling are still intact. It remains vulnerable to more downside. Portugal will sell a maximum of EUR 2.5b of 3-, 6- and 11-month bills today and might not trigger much reaction. The real test will be from France sale of EUR 9.5b of bonds, maturities from 2 to 28 years, tomorrow. Meanwhile, Greece will resume talk with international private bond holders today to continue the negotiation on the so called "PSI" deal.

The World Bank warned that global economy has "entered a very difficult phase characterized by significant downside risks and fragility". Global growth forecast in 2012 was slashed from 3.4% to 2.5%. 2013 growth projection was also lowered from 3.6% to 3.1%. The Washington-based organization also said that both developed and developing country growth rates could "fall by as much or more than in 2008-2009" and probability attached to the downside scenario has increased since last June. It also said Eurozone was already in recession and could contract -0.3% this year, down from prior projection of 1.8%. US growth projection was lowered to 2.2%, down from 2.9%.

BoE Posen predicted that the world is entering into a phase of multipolarity as in late 19th and early 20th centuries. He expected dominance of US dollar to decline in the next 10 to 20 years. Meanwhile, he also expected end of the period of "reserve accumulation" as "politically influential" middle class pressures government on policies. Posen also hit back on claims that the world is facing a coming period of inflation with central banks "actively inflating away government debt," and said they're "unfounded."

On the data front, UK employment data will be a main focus today where unemployment rate is expected to be unchanged at 8.3% in November and claim count is expected to rise 7k in December. Swiss ZEW expectation will be featured too. From US a number of economic data will be released including PPI, TIC capital flows, industrial production and NAHB housing market index.