BoE Decision today: market clearly voting for a cut. ECB's Trichet in a tough spot at today's press conference.

USD trading at new recent highs as the dollar index closes in on its 55-day moving average ahead of tomorrow's US employment report.

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• The Reserve Bank of New Zealand left rates unchanged at 8.25%
• Japan Nov. preliminary Machine Tool Orders rose 13.0% YoY
• Switzerland Nov. Unemployment rate rose to 2.7% vs. 2.6% expected

THEMES TO WATCH – UPCOMING SESSION
Key event risks today (all times GMT):

• UK Oct. Industrial and Manufacturing Production (0930)
• Germany Oct. Factory Orders (1100)
• UK BOE Interest Rate Announcement (1200)
• EU ECB Interest Rate Announcement (1245)
• EU ECB's Trichet to speak at post-announcment press conference (1330)
• US Weekly Initial Jobless Claims (1330)
• Canada Oct. Building Permits (1330)
• Canada Ivey PMI (1500)
• Japan Q3 Final GDP revision (2350)

Market Comments

Yesterday was key for the USD, as the dollar index made a new high since early November and is now trading a fraction of a percent below the 55-day SMA. The trigger this time around was the ADP report, which showed strong job growth in November in the private sector. This number hasn't done a good job of calling the Nonfarm Payroll number, but it is still gives the market cause for pause. If employment is doing well, after all, will the Fed really be tempted to consider the 50 bp cut. This latter idea was gaining plenty of steam lately, but the market may have to roll back its expectations even further to a 25 bp cut if the employment report tomorrow shows resilience. The ISM Non-manufacturing number yesterday was lower than expected, but still well above 50.

UK bears got perhaps more than they bargained for yesterday, as an ugly Services PMI and house price data yesterday combined with dire warnings from the UK's Council of Mortgage Lenders to absolutely shatter the pound. It's almost shocking to see that there is still debate out there in the media on whether the BOE will cut today. The consumer has seen a de facto 100 bp+ tightening considering the credit environment while the economy and housing market are showing sharp signs of deceleration. The BOE's procrastination has probably already cost even more pain for the UK economy than would have been the case if they had already begun to ease rates. If by some miracle the BOE doesn't cut today, it will only provide good selling opportunities for GBP. 2.0000 in GBPUSD may come into view very quickly here. I give an outside chance that the BOE members will even cut 50 bps today (they certainly ought to....)

The ECB's Trichet is not in an enviable spot, though it must be an enormous relief to see the EUR pushing lower towards 1.4500 rather than knocking at the door to 1.5000. Still, in the big picture, the strong EUR is a problem and a growth risk for Euroland and has to enter into the ECB's interest rate calculus. The ECB is always and forever stating that it is about inflation fighting, but Trichet will perhaps want to communicate as much dovishness as possible without any outright promises of a rate cut in view of the strong EUR. In any case, watch the press conference closely for any new rhetorical twists. EURUSD may continue to correct lower toward its 55-day SMA, currently around 1.4430 with a dovish outcome.

Risk appetite has blossomed yet again, as treasuries finally eased lower (yields rallying) after yesterday's ADP report. Again, if this continues, this could keep the USD reasonably bid considering the extreme projections the market is giving for forward US rates and the higher volatility in US rates compared to, for example, European rates. AUD enjoyed this fresh tailwind of risk appetite as it actually rose against the greenback yesterday even as the dollar index was rising, meaning that the likes of EURAUD saw a huge move lower from yesterday's highs. the JPY is not finding many buyers in this environment either, and we wonder if the USDJPY correction could see an acceleration to the 113.00 area if the resistance at 111.20 gives way. For this to unfold, we would need to see continued bouyancy in equities and signs of easing pressure on credit markets - in any case, the technical situation in USDJPY is tricky - see Charts below.

The overall USD view looks short term bullish, but we're coming up against key resistance areas technically in the bigger picture - and these inflection points where the short term moves and the longer term trend support collides are tricky. The coming few days may be crucial.

Chart: USDJPY

Here's a classic example of shorter and longer technicals causing a quandary in choosing direction. While the overall USDJPY trend is clearly down, a break above 111.20 could give room for upside extension toward 113.00 without fully breaking the trend. In the meantime, a break below recent lows at 109.55 could see the pair probing the base again. Note that the 111.34 level is the first Fibo for the move from the 117.93 top to the 107.27 lows, while the recent lows at 109.55 are just below the 109.70 first Fibo for the move from the 107.27 base to the recent 111.20 high. Which way from here?  We're likely to get an answer soon.