The dollar regained its footing by the New York afternoon following earlier selling against the euro, sterling and yen. A sluggish retail sales report for December was the catalyst for the greenback's drop to multi-year lows versus the yen at 106.62.

The December retail sales figure unexpectedly dropped by 0.4% versus a 1.2% increase from November, meanwhile the excluding autos report also fell by 0.2% from a 1.8% reading previously. The producer price fell by 0.1%, versus 3.2% a month earlier while the core reading slipped to 0.2% from 0.4%. The data reinforces expectations that the Fed will aggressively cut rates by 50-bp when it meets at the end of the month.

Sterling Rallies
The pound rallied sharply against the euro and dollar, triggered by UK inflation reports earlier in the morning and soft economic data from the US and Eurozone. The sterling recovered from all-time lows versus the euro as traders analyzed the CPI and RPI data and ruminated about its subsequent impact on BoE policy. Sentiment for the sterling remains heavily bearish in light of further anticipated rate cuts from the Bank of England and deteriorating economic conditions in the UK.

The December consumer price index held above the BoE's comfort zone at 2.1% y/y and 0.6% m/m. The retail price index edged up to 0.6% from 0.4% in the previous month, while declining to 4.0% from 4.3% a year earlier.

We maintain our view that the sterling will continue to underperform in the coming months and would look to sell into rallies.

The sterling bounced off its all-time lows versus the euro from 0.7611 and recovered above the 1.96-level against the dollar. Cable will find interim support at 1.96, backed by 1.9560 and 1.95. Additional support will emerge at 1.9480, followed by 1.9430 and 1.94. On the upside, initial ceilings are eyed at 1.9650, backed by 1.97 and 1.9740. Subsequent resistance will emerge at 1.98, followed by 1.9840 and 1.9875.

Euro Climbs Above 1.49
The euro briefly jumped above the 1.49-level and coming within reach of its record high against the dollar on the heels of the lackluster US retail sales report. Although the single currency's gains were not sustainable today, we look for the euro to gradually make a move toward the psychologically-key 1.50-level over the coming weeks.

Germany's ZEW survey reflected worsening conditions in the Eurozone's largest economy with the current conditions survey down to 56.6 from 60.0 while the economic sentiment index posted a -41.6 reading versus -37.2 a month earlier.