Euro, Pound Finds Support Despite Declining Manufacturing Activity, Bernanke To Speak

The Euro accumulated over 100bps in gains through overnight trading as equity markets looked to rebound after a week of risk aversion. The first increase in German consumer prices since July, 2008 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. The Euro’s strong correlation to risk appetite was evident today as the single currency gained despite weak fundamental data and ECB member Lorenzo Bini Smaghi dovish comments. The policy maker stated that “If the (economic) situation worsens, the ECB is ready to reduce rates further, even to zero,” in an interview with German business paper Boersen-Zeitung. This is a departure from the consistent rhetoric from the central bank that a zero interest rate policy wasn’t a possibility. He would go on to say that increased deflationary pressure would be the main cause of such an aggressive move. 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 which could lead to heavy Euro trading. The 20-Day SMA at 1.2701 has provided resistance again for the euro/dollar which could leave the pair open to a retrace during U.S. trading.