Euro Weakness Persists after Lower than Expectation Inflation

Euro remains the biggest loser this week after release of lower than expected inflation data in Dec that fuels speculations of rate cut from ECB on Jan 15. Flash HICP estimate in Dec dropped more than expected from 2.1% to 1.6% yoy, versus consensus of 1.8%. This is the first time that inflation fell below ECB's 2% target since Aug 2007 and is the lowest rate in two years. Eurozone Services PMI for Dec is revised slightly higher to 42.1 but provides no support to the common currency.

On the other hand, Sterling is supported by unexpected improvement in Dec Services PMI from 40.1 to 40.2. Released earlier, Nationwide consumer confidence dropped to 47. Dec. Nationwide house price dropped more than expected by -2.5% mom, -15.9% yoy in Dec.

EUR/USD dives to 1.3372 and is heading to next target of 61.8% retracement of 1.2329 to 1.4719 at 1.3242 first. EUR/GBP also falls to as low as 0.9101 and is set to test 0.9 psychological support (with 50% retracement of 0.8234 to 0.9798 at 0.9016). At this moment, we're still expecting some support at this 0.9 level and above 0.9304 will argue that fall from 0.9799 has completed. However, a firm break of 0.9 will be an important indication that whole rise from 0.7693 has completed and in such case, deeper fall should be seen towards 55 days EMA at 0.8759 next.

EUR/CAD falls further to as low as 1.5860 so far. As mentioned before, a short term reversal has at least occurred with double top formation completed (1.7499, 1.7492). Further fall could be seen to retest next important support level at 1.4821. Above 1.6262 will turn intraday outlook neutral but short term risk will remains on the downside as long as double top neckline at 0.6750 holds.

Dollar index's firm break of 83.11 cluster resistance (50% retracement of 88.46 to 77.69 at 83.07) further affirms the bullish scenario. The three wave structure of the fall from 88.46 to 77.69 suggests that it's merely a correction in the larger up trend. At this point, intraday bias will remain on the upside for 161.8% projection of 77.69 to 81.62 from 79.63 at 85.99 first. Break will bring retest of 88.46 high. Below 82.55 will turn intraday outlook neutral and bring pull back. But downside should be contained well above 79.63 support and bring rally resumption.

Looking ahead, 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.