Market Drivers for Jan. 25, 2013

EURUSD, USDJPY fresh yearly highs, IFO beats
UK GDP sinks -0.3% in Q4
Nikkei 2.88% Europe 0.58%
Oil $96/bbl
Gold $1667/oz.

Europe and Asia:
EUR IFO 104.2 vs. 103.1
GBP UK GDP -0.3% vs. -0.1%
GBP Index of Services 0.6% vs. 0.5%

North America:
CAD CPI 8:30
USD New Homes Sales 10:00

Another night of divergent trade in the currency market as EURUSD and USDJPY hit fresh yearly highs while cable sagged due to weaker than expected GDP data and comdollars continues to lag behind. In UK the GDP data was woeful with the preliminary Q4 print coming in a -0.3% versus -0.1% eyed. This was the third quarter of contraction out the last five and the worst GDP performance since Q2 of 2012.

According to the ONS the fall in output was largely due to a drop in mining and quarrying, after maintenance delays at the UK’s largest North Sea oil field. If oil and gas extraction were excluded from the overall gross domestic product (GDP) calculations, then the data would have shown that the economy shrank by only -0.1% in the fourth quarter, the ONS said.

Cable sank to fresh session lows of 1.5745 in the aftermath of the release but managed to stabilize and recover above the 1.5750 level. Although the news clearly showed that the UK economy was very weak, the markets may dismiss the number as a one off event with the worst already behind it. The latest labor data out of UK was surprisingly robust and currency traders may be starting to bet on a recovery in Q1 thus providing a modicum of support for the pair after a massive selloff over the past several weeks.

Nevertheless, cable remains vulnerable to further downside pressures if the North American session decides to push the unit lower. For now the 1.5745 lows are holding but a break there could take us to a test of 1.5700 as sentiment toward the pound remains negative.

Meanwhile in Germany IFO index beat market expectations sending EUR/USD to fresh year to date highs as investors continued to bet on an economic rebound in the Eurozone. IFO printed at 104.2 versus 103.00 forecast while the expectations index hit 100.5 above 99.00 anticipated.

The positive reading comes on the heels of much better than expected results from the ZEW survey earlier in the week and stronger flash PMI data out of Germany yesterday showing clear evidence that the economic climate in EZ largest economy is improving as we start the new year.

The news has given investors hope that the dour economic growth projections by the ECB may have been too pessimistic and currency markets pushed the EUR/USD through the 1.3400 ahead of the data and kept the rally going in the aftermath of the release as the pair targeted the 1.3450 level in morning European dealing. With EUR/USD now above the yearly highs the bulls will try to press their case towards the psychologically key 1.3500 barrier as the day proceeds.

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