Daily Report: Euro Remains Pressured ahead of Inflation Release, Busy Calendar Ahead

Euro remains pressured as markets are awaiting the highly anticipated HICP inflation flash estimate in Dec from Eurozone. ECB comments took a drastic turn with ECB member Constancio and Vice President Papademos voicing out support for rate cuts should inflation ease further. HICP is expected to ease from 2.1% yoy to 1.8% yoy in Dec which is consistent with ECB's definition of price stability of 'below 2%, close to 2%' and that should give much room for ECB to cut rates to revive the deepening recession in the Eurozone. Meanwhile, as Papademos said, ECB might not allow inflation to "fall significantly below 2 percent for a protracted period of time," and thus deeper than expected fall in inflation would probably force the ECB to cut rates sooner than expected on Jan 15. After all, at least, traders continue to take profits on Euro long positions that's built up during the sharp rally in Dec. Also to be released from Eurozone, finalized service PMI in December probably contracted further to 42 from 42.5 while that in Germany should have improved to 46.4 from 45.1.

Technically speaking, Euro's decline versus commodity currencies is even more severe than against dollar and yen. Note that EUR/CAD has taken out mentioned double top neck line support of 1.6750 yesterday (tops at 1.7499 and 1.7492) and is risking a retest of 1.4821 support level. EUR/AUD should be heading towards lower end of medium term range at 1.8487.

From UK, Nationwide consumer confidence dropped to 47. Dec. Nationwide house price dropped more than expected by -2.5% mom, -15.9% yoy in Dec. Sterling retreats mildly against dollar and yen but remains supported by selling in EUR/GBP. main focus is indeed on Dec Services PMI and unexpected improvement there will likely give the pound another boost against Euro and yen. As mentioned before, a short term top is in place in EUR/GBP at 0.9799, with bearish divergence condition in 4 hours MACD and RSI. At this point, intraday bias will remain on the downside as long as 0.9459 minor resistance holds and further fall should be seen to 50% retracement of 0.8234 to 0.9798 at 0.9016, which is close to 0.9 psychological level. Though, downside is expected to be contained there and bring up trend resumption.

Elsewhere, dollar index continues to press mentioned 83.11 cluster resistance. US ISM non-manufacturing probably fell to 37, another 11-year low, in December. We believe it's possible to have downside surprise given the weaker-than-expected manufacturing ISM report released last week. The employment index remains in focus as it gives a preview on Friday's payroll data. November's pending home sales is forecast to have plunged 1% yoy in November. Factory order would have recorded the 5th sharp decline in November with drop in non-durable components. FOMC minutes from the Dec 15-16 meeting is another focus as we will likely learn more about the Fed’s quantitative easing campaign. In Canada, decline in energy price would have dragged November PPI down to negative territory of -1% mom.