• S&P rating on Japan lowered to Aa- from Aa; outlook stable
  • Euro zone economic sentiment eases to 106.5 in January from revised 106.6 in December, weaker than median forecast of 107.0 – EU Commission
  • Euro zone selling price expectations in industry rise to 16.5 in January from 15.2 in December (helped underpin ECB rate hike speculation)
  • ECB’s Bini Smaghi: Strong dynamics in emerging countries are likely to result in higher inflation in imported goods than in previous decade. Expected rise in imported goods inflation cannot be ignored, core inflation measure losing its relevance
  • ECB’s Bini Smaghi: Only by having domestic inflation siginificantly lower than 2% in euro zone, other advanced economies, is it possible to avoid second-round effects, maintain growth in line with potential
  • ECB’s Trichet: We are credible in the delivery of price stability over the next 10 years
  • Spain December calendar-adjusted retail sales -3.8% y/y, weaker than median forecast -2.1%
  • Spanish govt says has reached preliminary agreement with unions on pension reform
  • Leading economic indicator for euro area rose 0.8% in December to 107.3
  • UK CBI retail sales balance +37 in January vs 56 in December, slightly stronger than median forecast of +35
  • China FinMin: To introduce property tax throughout China. Tax to narrow wealth gap. Revenues from tax to be included in local fiscal budgets

Japanese yen weaker across the board this morning after S&P downgraded Japan (see above.) USD/JPY is up at 83.05 from early 82.15 having been as high as 83.20 so far. Japanese exporter sell interest above 83.00 has helped slow the ascent. EUR/JPY up sharply at 113.90 from early 112.60.

EUR/USD effectively unchanged on day at 1.3710. Inbetween it’s been all over the shop, trading a 1.3638-1.3756 range. Initially pair rallied, took out well-touted 1.3725 barrier option interest only to be followed by fast, steep sell-off. Quick profit taking by those who engineered the barrier knock-out and notable selling from an Asian sovereign and a large US commercial bank helped drive the descent.

The sell-off turned into a rout as everyone seemed to want to head out the door at the same time. We got as low as 1.3638 before steadying, and were already slowly recovering when a couple of factors sent us spiking quickly back over 1.3700.

Traders noted first the selling price expectations in the EU Commission survey followed by hawkish comments from ECB’s Bini Smaghi (see both above) The combination helped fuel further expectations of an early-ish ECB rate hike.

BIS started selling around 1.3705 and continued selling at higher levels, but 1.3750 barrier interest was taken out on way to session high 1.3756. We then saw the same process as we had with the 1.3725 barrier, as profit taking quickly ensued. Reserve Bank Of India was a notable seller around the highs.

Cable up at 1.5950 from early 1.5900, supported by heavy EUR/GBP cross. The cross is down at .8595 from early .8620. The same US commercial bank seen selling EUR/USD around the early 1.3730 high also sold the EUR/GBP cross aggressively around the same time.

Cable sell stops seen through 1.5980. Sell orders seen clustered up around 1.6000.