evening report

A relatively empty economic calendar will leave dollar price action up to the broader macro trends. Risk appetite has slightly picked up which has weighed on the dollar during overnight trading. Wholesale inventories are due for release and are expected to have declined by another 1.0% in January after a 1.4% decline the month prior. The declining expectations for demand have led to a massive reduction in production which is starting to decrease supplies. As goods increasingly grow scarce and dollars become more plentiful as the government pumps them into the system, the risks of inflation will grow. Therefore the central bank may need to reverse their recent easing as soon as growth begins to return to avoid historic increases in prices. Fed Chairman is scheduled to speak today on bank regulation and if the markets don’t like what he has to say, it could negatively impact demand for stocks and lead to dollar weakness. Euro accumulated over 100bps in gains through overnight trading as equity markets looked to rebound after a week of risk aversion. The first increase inGerman consumer prices added further evidence that prices are beginning to stabilize. However, the remainder of the economic docket provided more evidence that the European recession is deepening. Indeed, German exports fell by 4.4% which was the fourth straight month of weakness, which led to an increase in the trade balance to 8.5 billion from 7.3 billion. Meanwhile, French manufacturing fell 4.1% in January bringing the annualized decline to 16.5%. A 15% drop in consumer goods was the main cause of the decline as the deepening recession continues to lead to consumers retrenching. ECB is ready to reduce rates further, even to zero.. Although the increase in German prices makes that scenario less likely, a drop in Chinese prices could filter through to the global economy and raise those concerns again. Meanwhile, Bundesbank President Axel Weber is on the worse stating that the German economy is expected to be hit worse than expected by the global downturn .Pound has regained its footing after whipsaw action following a manufactering production dropped. Activity fell 2.9% in January dragging the annualized rate to -12.8% signaling that the U.K. economy may see a deeper than expected contraction in the first quarter. An 18% drop in metals led the way as the global recession has destroyed demand for raw materials. . However if we see a reversal in risk appetite then the dismal fundamental data could see a return of recent bearish pound sentiment. Yen weakened as advances in stocks curbed demand from investors seeking a refuge from the global financial turmoil. Japanese currency fell and snapped two days of gains versus the dollar as the MSCI World Index climbed for the first time in four days and U.S. stock futures rose.