The dollar began Tuesday trading in a range as market particpants remained undecided as to whether a Greek default or a satisfactory resolution would prevail. However a resolution seemed more probable as the day prgressed and the euro appreciated sharply against the dollar, breaking out of the tight range. Fed Chariman Bernanke's testimony to House of Representatives may have weakened the dollar after he reiterated his view that interest rates would remain below 2% for 2012/13 and that a increase in taxes in 2013 could cause a slow down. These views would be in line with a more accomodative Fed stance and possibly more quantitative easing (QE) with a depreciative effect on the dollar. Bernanke was more positive, however, about manufacturing and unemployment compared to his FOMC speech. On the data front, Sentiment showed an uptick as the IBD TIPP Economic Optimism survey (Feb) rose to 49.4 versus the 48.1 expected and further evidence of improvements in the labour market were confirmed by JOLTS Job Openings in December, which rose to 3376 versus the 3250 expected. Consumer Credit later tonight is expected to show a fall of over 50% from the previous month.

   The euro rallied following rumours of a breakthrough in Greek debt talks. Earlier the single currency had been pressured by data showing a greater than expected fall in German Industrial Production of -2.9% (Dec) versus expectations of no-change, and the annualized figure down to 0.9% versus expectations of a 4.3% rise and a 4.4% rise in the previous month. The sudden fall in output had dampened the outlook for the euro, however rumours that talks were close to a resolution led to a significant recovery; and there is still time before the 15th February deadline after which it will be too late to prepare the legal documentation for the bailout. The other focus was on the outlook for monetary policy as next ECB rate meeting is on Thursday. There is slightly higher - 58% chance - of the ECB cutting rates by another 25bps according to Credit Suisse Overnight Index Swaps. However, if the central bank goes ahead as expected with its 3-month LTRO at the end of the month then it is unlikely to also ease rates as well.

   The pound shot up on Tuesday reaching highs of 1.3269 following the a rise in risk appetite. Sentiment reversed after reports that negotiators in Greek debt talks were very close to reaching an agreement helped allay fears of an unruly default as the March refinancing deadline nears. Earlier on poor data from the euro-zone had weighed on riskier currencies but the rumours from Greek debt talks led to a reversal in sentiment. Sterling traders are now looking ahead to the BOE rate meeeting on Thursday when they think the BOE will announce more QE. Last week's positive Manufacturing and Services PMI came as a surprise and introduced an element of doubt into whether or not the BOE will press the button. Today's better-than-expected BRC Sales figures, which showed a -0.3% fall instead of the -0.8% expected were also broadly supportive of sterling. Recent housing sector data, however, remained negative.Many traders, may be standing aside to see what the rate meeting holds and as an increase in QE would almsot certainly trigger a sell off in the pound.

    The Japanese yen weakened against most counterparts on Tuesday after sentiment lifted following an easing in euro-zone debt fears and safe-haven demand for the yen lessened. The spike came after rumours that Greek debt negotiations were close to a resolution. An increase in intervention fears may also have helped undermine the yen after it it was revealed that the BOJ had undertaken covert operations in November which no-one had known about at the time. This came as the Finance Minister Jen Azumi had been cranking up the rhetoric of intervention, saying that he would have no hesitation in using intervention to correct excessive appreciations as a result of speculation, adding that he thought the value of the currency was out of whack with its fundamentals. On the data front the Leading Index (Dec) rose to 94.3 versus 93.8 expected and 93.7 previous and the Coincident Index (Dec) also rose to 93.2 versus 93.1 estimated and 90.3 previous.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst