Euro Erases Friday's Losses as Risk Appetite Returns on PBOC Hold, Tax Cuts

Euro Erases Friday's Losses as Risk Appetite Returns on PBOC Hold

, Tax Cuts

Talking Points

Japanese Yen: Weighed By Risk Appetite

British Pound: Housing Troubles Weighing

Euro: Finding Bid on Broader Optimism, German Support

U.S. Dollar: At Mercy of Broader Trends as Traders Eye FOMC Meeting

The People's Bank of China refraining from tightening rates and the expected approval of U.S. tax cuts have fostered a return of risk appetite and helped the Euro looking to erase Friday's losses. An empty economic docket will likely leave currency markets in the hands of broader trends which is shaping up to be a positive start to the week as easing concerns over Europe and a brighter outlook for growth is fueling optimism. The French current account deficit shrinking to 2.5 billion from 4.4 billion and French wages growing 0.3% were the only releases to cross the wires and had very little impact of direction

Comments from German Finance Minister Wolfgang Schuble that it was unlikely that any country would be ejected from the E.U. are helping ease concerns over the region. The Economic Union's largest economy continues to show its willingness to stand with its fellow members and weather the current crisis in order to maintain their single currency. It is a stark contrast from the lack of solidarity that we saw at the onset of the debt issues when Greece first came under fire. Therefore, markets have more confidence that the region can persevere if its unquestioned leader is willing to do whatever it takes to maintain the union. The EUR/USD has broken above a four day descending trend line which has exposes the 20-Day SMA at 1.3335. However, upside potential remains limited as the issues in Europe rare far from being solved and any signs that risk appetite is waning could increases downside risks.

The British Pound is back under pressure after temporarily regaining its footing as disappointing housing data is fueling the outlook for additional asset purchases from the BoE. The Rightmove housing price index fell 3.0% in December following a 3.2% decline the month prior. The agency also revealed a dour forecast for another 5% drop in 2011 which could force policy makers to restart QE efforts despite high inflation. A strong producer price report and broader optimism provided brief support, but markets have resumed pricing in more additional measures from the central bank. Factory gate prices rose 0.9% beating estimates of 0.5% but slower than the month prior 2.2% pace. Most of the gains prices came from volatile fuels costs which is minimizing the impact from the report. We expect Cable to continue chop around today as broader optimism will be supportive which will leave the GBP/USD in its current range between 1.5700-1.5850.

The greenback was under pressure overnight on the broad based risk appetite which could lead to more losses throughout the day with a light North American economic docket. Canada's capitalization reading for the third quarter is the only fundamental release on tap and holds very little market moving potential. Traders should take their cures from equity markets as the dollar continues to show a strong negative correlation to risk taking. Overall we may see a quiet day with the FOMC rate decision looming, as markets will look to see if Fed Chairman Ben Bernanke expands on recent comments that there is room for more QE beyond the initial $600 billion. However, signs politics is threatening the passing of the Obama-GOP accord on taxes could quickly dim optimism and fuel dollar support on safe haven flows.

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