Talking Points

• US Dollar Sold as Asian Stocks Followed Wall Street Higher
• Euro May Rise on Signs of Strong ECB 3-Year LTRO Demand
• Bank of England Minutes Unlikely to Boost QE Expectations

TheUS Dollar (ticker:USDollar) traded broadly lower overnight as Asian stock exchanges followed Wall Street higher, weighing on the safe-haven currency. The news wires chalked up the pick-up to unexpectedly strongGerman IFO as well asUS Housing Starts andBuilding Permits, which were said to collectively temper fears about the slowdown in global economic growth. Lower borrowing costs at aSpanish bill auction also helped, offering a bit of a respite from Eurozone debt crisis fears. In truth, while none of these events amounted to anything materially game-changing. Indeed, the improvement in US data has been underway since June while comparing the IFO Expectations and Current Conditions components points to downswing in business activity over the coming 6 months, albeit a less severe one than economists expected. Finally, the short tenor of the Spanish bond auction is hardly indicative of the degree of funding stress likely to arise as the bond expiry calendar fills up next year. With this in mind,year-end profit taking seems to be a far more plausible catalyst.

Looking ahead, all eyes are on theEuropean Central Bank as policymakers announce the allotment results of its new3-year long-term refinancing operation (LTRO), a program offering cheap loans to banks experiencing cash shortages courtesy of the turmoil in Eurozone debt markets over recent months. Signs of strong demand are likely to prove initially supportive for theEuro in that the probability of a credit crunch in the immediate term would be relatively diminished but likely transform into something negative with time as traders take stock of the depth of the liquidity shortfall and the degree of reliance on ECB funding in the banking system. Alternatively, soft uptake will probably produce the opposite effect, producing downward pressure on the single currency as an initial outcome followed by rosier sentiments in the weeks ahead.

On the economic calendar,minutes from December’sBank of Englandmonetary policy meeting are in the spotlight. Traders will focus on the voting pattern across the rate-setting MPC committee to gauge whether a consensus toward expanding quantitative easing (QE) is starting to emerge. Significant changes to the outlook are unlikely this time around however, with policymakers once again voting unanimously to maintain the benchmark interest rate and asset purchase target unchanged. The tone of recent economic data haspointed to stability rather than deterioration.In fact, economists’ consensus forecast for 2012 UK economic growth (as polled by Bloomberg) has been essentially unchanged since late October, ending a dramatic slide beginning in July. This suggests Governor Mervyn King and company are likely to remain in wait-and-see mode at least for now.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

---Written byIlya Spivak, Currency Strategist forDailyfx.com

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