Risk aversion characterized the markets last week and as a result dollar and yen were the winners!

the fight against higher inflation and falling currencies characterized emerging markets last week with India rising interest rates as well as Turkey. The fear helped Japanese yen, and hit commodity currencies, especially the NZD and the CAD (fresh 4 year high for USDCAD). On the other side the euro came under renewed pressure after inflation data from the Eurozone showing further disinflationary pressure. EU CPI was registered at 0.7% versus 0.9% expected the second month in a row that consumer price index is lower than forecasts. The annual inflation rate in Germany also dropped to 1.3% in January. Unemployment rate in Eurozone was registered at 12.0% versus 12.1% but all of the improvement was in Germany (German employment market had a sharp drop of 28,000 in the number of unemployed, beating forecasts ) which continues to vastly outperform the rest of the European union. Yet even in Germany final demand was surprisingly weak. German retail sales fell to -2.4% versus 0.2% expected indicating that even in strongest european economy consumers remain highly cautious. At the same time, across the Atlantic Fed announced Taper of another $10 billion as expected. Together with strong GDP (3.2% in the fourth quarter of 2013, following a big gain of 4.1% in Q3) US dollar was on the rise. According to purchasing managers indices, retail sales, unemployment rate and various other measures, the recovery in US continues at a steady pace. The only thing that could have slowed USD down was the Non-Farm Payrolls report, that showed a gain of only 74K jobs (far below the 196,000 gain expected by analysts) in December but it didnt manage. This is Ben Bernankes last rate decision, as he stepped down on January 31st , with Janet Yellen substituting him. As a consequence EUR/USD had a negative week, losing nearly 200 pips (started close to 1,37 and closed at 1,3488). The critical ECB rate decision and Non-Farm Payrolls are the highlights in a week that also features rate decisions in the UK and Australia as well as employment rate from Canada and New Zealand. Will ECB change its monetary policy? ECB will likely leave its policy unchanged, but could certainly set the ground for a negative deposit rate in March. Inflation continues to fall in Germany and in Eurozone, that makes impossible for Mario Draghi to deny the danger of deflation. The pressure on ECB to stimulate demand is growing especially if the current situation in emerging market economies begins to have negative effects for Eurozones exports.