Evening Report-Feb 04.

Rupee trimmed some gains against the U.S. dollar and closed at 48.81 levels because banks bought dollars for importers at higher rupee levels. Indian unit had risen around 25 paise in early trade . Dollar's rise against major currencies like Euro and pound sterling prompted banks to buy the greenback. U.S dollar could remain under pressure as risk appetite continues to increase. Although, traders remain cautious equity markets the expectations that a stimulus package will ultimately pass through the Senate has fueled bullish sentiment. Today’s economic calendar may threaten that optimism as the ISM non-manufacturing gauge is expected to show further contraction to 39.0 from 40.1in the sector that accounts for 70% of GDP. Additionally, the ADP employment report is expected to show that the economy lost over 500,000 in January. The report which has been reconfigured too more closely reflect the NFP report due Friday and may provide major event risk for the dollar. Euro stumbled after reaching as high as 1.3070 dropping a 100 bps down to 1.2920. The Euro-zone PMI service final reading for January slipped to 45.2 from the preliminary print of 45.5. Germany and France both saw their individual gauges revised lower which dragged on the overall index, which contracted for an eighth straight month. Meanwhile, retail sales in the region were flat for December which beat expectations of a –0.2% decline. However the year-over-year reading fell 1.6% which was greater than the –1.4% forecasted. The lack of domestic growth will remain a weighing factor on the economy and the service sector and may prolong the current recession. However upside potential may be limited with a pending ECB rate decision tomorrow. Although expectations are that the central bank will keep rates on hold falling inflation and a deepening recession could force President Trichet to continue the current easing policy. U.K. fundamental data continues to improve as the service PMI added to an improving outlook with a print of 42.5 after 40.2 the month prior. The small signs that the U.K. economy may be bottoming could give the BoE reason to pause its easing policy. Expectations are that the central bank will cut rates by 50 bps tomorrow. However, if Governor King signals that they may have reached an end to their easing cycle then we could see the pound continue to gain. The pound/dollar has bounce from its overnight low of 1.4330 and is now looking to test the high of 1.4460. Japanese yen rose against the dollar as traders sought refuge in the currency amid concern the U.S. fiscal stimulus plan will meet Senate resistance and widening credit losses will erode earnings.