3rd of February 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
3 February 2011 – 8:00 GMT
Thursday

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Market Analysis Desk
Foreign Exchange Research: www.fibosignals.com/5585/resources.html
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FUNDAMENTAL ANALYSIS at 0800 GMT

USD

With much of Asia on holiday, the FX price action was relatively subdued. The dollar did strengthen marginally on signs of escalation in Egypt which coincided with a general stalling of the risk rally. EURUSD traded 1.3771-1.3817, USDJPY 81.49-81.76. A better ADP print also helped the dollar's cause earlier, but market participants are wary about extrapolating from this reading to Friday's official non-farm payrolls report.

ADP private payrolls for January were +187k (cons. +140k). Our analysts still forecast a below-consensus gain in Friday's jobs report. Fed Chairman Bernanke is due to speak on "The Economic Outlook and Macroeconomic Policies." We think he will have to depart significantly from the latest FOMC statement to really affect the dollar but his comments on inflation will be interesting as he recently said the risk of deflation has "receded considerably," while the FOMC noted only that "measures of underlying inflation have been trending downward”.

EUR

Today's ECB policy decision is expected to be a non-event and the focus again falls on President Trichet's subsequent press conference. Hawkish overtones are expected given the latest Eurozone CPI print for January came in at +2.4% y/y, which is well above the ECB's target of "below, but close to 2%". Our European economists do not expect a policy rate hike until Q4.

S&P downgraded Ireland one notch to A-, keeping the rating on watch negative. However, both Moody's and Fitch rate the sovereign one notch lower still.

European Council President Van Rompuy said the EU is planning to announce a comprehensive solution to the sovereign debt crisis by March 25 - the scheduled date of the second of two upcoming EU Summits.

GBP

MPC members Charles Bean and Andrew Sentance offered different views on prospective monetary policy. Sentance sounded hawkish as usual, suggesting that the weak Q4 GDP report released last week should not be considered too significant and is likely no more than a fluctuation.

Bean on the other hand seemed in no hurry to hike the policy rate, noting that the current policy setting is "sensible" given that the recovery is "fragile". He also forecast that inflation will "come back down towards the target" in the absence of further external shocks.

Construction PMI came in well above consensus at 53.7 for January, suggesting that activity has bounced back following the adverse weather in December. The more important Services PMI is due today.

A. M. Negrin Bautista, CFA

Chief Analyst at Fibosignals.com

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