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Top Stories

• Asian equities open week to the downside Hang Sang down -3.5%
• Massive snow storm hits UK, sidelining many businesses
• Obama stimulus bill heads for debate in Senate
• Oil slide continues to $40/bbl
• Gold at $914/oz off higsh but holing $900 level

Overnight Eco

• NZD Labor Cost Index 0.7% vs 0.9% eyed
• AUD AIG Manufacturing Index bit better at 36.3 vs.33.7 last
• AUD HIA New Home Sales -1.7% vs. -4.1% last
• AUD Home Price Index improves to -0.8% vs -1.1% forecast
• AUD Commodity Prices continues to sink to 28.6%
• CHF SVME PMI 35.0 vs. 36.1 called
• EUR Final Manufacturing PMI 34.4 vs. 34.5
• GBP Manufacturing PMI 35.8 against 34.4 expected

Event Risk on Tap

• USD Core PCE Price Index expected at 0.0%
• USD Personal Spending expected at -0.9%
• USD Personal Income expected at -0.4%
• USD ISM Manufacturing PMI expected at -32.7
• USD Construction Spending expected at -1.1%

Price Action

• USD/JPY slides to 8880 as risk aversion dominates
• AUD/USD crushed to below 6300 ahead of RBA rate cut tommorow
• GBP/USD profit taking ends rally as unit slides to 1.4200 in early London trade
• EUR/USD 1.2700 next in sight as risk aversion weighs

Last week’s counter trend rally in GBP/USD came to a crushing halt in early London trade today as the unit  slid nearly 300 points off its highs having reached key resistance at the 1.4500 level before  the week-end.  The  worst snowstorm  to hit UK in more than 15 years added to the sterling’s woes as businesses struggled to open at the start of the week. The primary cause for the down draft however was simple risk aversion and profit taking.    

With Asian markets deep in the red (Hang Sang closing -3.5%), risk aversion was the dominant theme of the day as traders saw no end in sight to the growing economic slowdown across the globe. UK data was of little help confirming that nations manufacturing sector remains mired in a deep slump. Although the UK Manufacturing PMI data actually printed a bit stronger than forecast at 35.8 against 34.9 the month prior, the improvement was minuscule indicating that demand has a long way to go before  reaching the 50 boom/bust level.

As we wrote earlier, “The news suggests that BOE will almost certainly lower rates by another 50bp this week taking the overnight rate to a record low of 1%. After a counter trend rally last week sterling appears to have  hit key resistance  at the 1.4500 barrier and given the strong down ward bias in the pair, that level could serve as a cement ceiling for GBP/USD for now, with fundamentals showing no rebound in sight.”

Meanwhile EUR/USD was also weak on the night, drifting towards the 1.2700 handle on risk aversion flows.  Traders continue to worry about the EZ ability to create an effective, coordinated response to the global economic crisis and those concerns have now filtered down to the political level. Le Figaro reported earlier today that President  Sarkozy has become so troubled by the latest developments that he wants to hold an extraordinary meeting of the heads of state in February, well ahead of the European Council meeting scheduled for March 19-20.        

Turning to North America US sees Personal Spending and Income data as well as ISM  Manufacturing report on the docket. The ISM data may surprise to the upside given the improvement in Philly and Empire  gauges, but the focus is likely to be on the US Senate where the Obama stimulus legislation proposal now  faces its stiffest test.  If Senate Republicans succeed in derailing the measure, the dollar rally could hit a brick wall, as much of the impetus for the move was based on the assumption that US fiscal response to the crisis will be much swifter than that of the Europeans. Given the Democratic  lead in the Senate however, the bill is likely to overcome the opposition, but for now that remains the key risk for dollar bulls going forward.

FX Upcoming

Currency	GMT	EST	Release	Expected	Prior
USD	13:30	8:30	USD Core PCE Price Index	0.0%	0.0%
USD	13:30	8:30	USD Personal Spending	-0.9%	-0.6%
USD	13:30	8:30	USD Personal Income	-0.4%	-0.2%
USD	15:00	10:00	USD ISM Manufacturing PMI	-32.7	-32.9
USD	15:00	10:00	USD Construction Spending	-1.1%	-0.6%

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.