Key Overnight Developments

• US Dollar, Yen Retreat as Senate Leaders Support Bernanke
• Australian Dollar Shrugs Off Weak PPI on Firmer Risk Appetite

Critical Levels

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The Euro trended slightly higher in overnight trading, adding as much as 0.2% against the US Dollar. The British Pound traded sideways, consolidating in a choppy range above 1.61 to the greenback. We remain short EURUSD at 1.4881.

Asia Session Highlights

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The safety-linked US Dollar and Japanese Yen traded broadly lower against most major currencies, with markets ignoring the selloff across Asian exchanges (seen as a pricing-in of Friday’s Wall St selling) to focus on the upswing in the more forward-looking US stock index futures, which gained 0.7% to start the week. The move higher was likely linked to assurances from Republican and Democrat US Senate leaders over the weekend hinting that Federal Reserve Chairman Ben Bernanke will be confirmed for a second term, easing some of the uncertainty around the leadership of the American central bank that emerged last week.

Australia’s Producer Price Index unexpectedly fell in the fourth quarter, slipping -0.4% from the three months through September amid forecasts of a 0.1% increase. Declines in electronic equipment manufacturing and petroleum refining led the metric lower, slipping -9.1% and -6.9% respectively. The outcome may prove to weigh on traders’ rate hike expectations as weaker wholesale price growth encourages concerns that overall inflationary pressure may prove too soft to justify additional near-term tightening. The Australian Dollar took the release in stride however, rising against its US counterpart on the upswing in risk appetite.

Euro Session: What to Expect

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Germany’s GFK Consumer Confidence is set to decline for the second consecutive month in February, likely pressured lower by fears that expiring government subsidies allowing firms to keep workers employed on shortened schedules rather than firing them will boost the jobless rate in the months ahead. A report scheduled to be released on Thursday is expected to show that the German economy lost 15,000 jobs in January – the most in seven months.

On balance, risk sentiment is likely to remain as the dominant driver of price action in the near term, with the safety-linked US Dollar and Japanese Yen set to continue retracing lower as US stock index futures advance.

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