Daily FX Market Outlook by AceTrader 14-1-2011

Market Review – 13/01/2011 21:53 GMT

Euro surges broadly on short-covering due to Trichet’s hawkish comments

Euro rose sharply across the board on Thursday after head of ECB Trichet expressed concerns about inflation. Traders bought the single currency aggressively on short-covering following his hawkish comments.

Although the single currency staged a pullback to 1.3088 in European morning, euro then staged a spectacular rally on hawkish remarks by ECB President Jean-Claude Trichet at the ECB press conference after ECB kept benchmark interest rate unchanged at 1.00% as expected. Trichet said ‘euro zone inflation was somewhat higher than expected in Dec., could temporarily increase further; risks to inflation outlook are still broadly balanced and risk could move to the upside.’   
Trichet’s comments triggered broad-based short-covering in euro, the single currency eventually climbed to 1.3383 versus the dollar. Cross-buying in euro also helped price as eur/jpy surged to 110.67 from 108.72, eur/chf rallied to 1.2885 from 1.2686 and eur/gbp rose to 0.8443 from 0.8314.  
In other news, the much-awaited Spanish bond auction ended successfully as demand was strong with a bid-to-cover ratio of 2.6 vs previous 1.6 in Nov 2010, however, Spain had to pay 4.542% interest for its 5-year debt vs previous rate of 3.576%.   
The greenback initially rose to 83.15 against the Japanese yen in Asia, however, the pair fell sharply to 82.55 in NY session before recovery. The greenback was pressured as U.S. initial jobless claims came in at 445,000, much higher than the forecast of 405,000 and the previous reading of 409,000.  
Despite the British pound’s initial dip to 1.5719, cable later rose sharply in tandem with euro and climbed to 1.5885 before retreating. On economic front, U.K. Nov manufacturing production came in at 0.6% vs forecast of 0.4%, Nov industrial production was weaker than expected, actual 0.4% vs forecast of 0.5% (British industrial output grew at its slowest annual pace since July). Later, BOE kept key interest rate unchanged at 0.50% and asset purchase target remained at 200 billion.  
Economic indicators to be released on Friday include:  
Japan Domestic CGPI, Germany CPI final and HICP final, Switzerland Combined PPI, UK PPI and CPI, and US retail sales, real earnings, industrial production, capacity utilisation and business inventories.