Is The Euro Due A Pullback And Has Support For The Aussie Withered?

Is the euro ripe for a pullback vs. the dollar?
* ....But less so versus the pound
* Are fundamental supports eroding for the Aussie?
It's a busy week for economic data, the highlights include UK and US
Q4 GDP, a Federal Reserve meeting, Bank of England minutes from the
MPC meeting earlier this month and the Bank of Japan also meets
today and tomorrow. This should be enough to create some volatility
in FX markets.

*The euro:*
With European data taking a back seat, recent euro strength could be
due a pull-back
The chart below shows EURUSD (pink line), the spread between 10-year
German and US government debt and CFTC positioning data on speculative
long EURUSD position (red line).
As you can see, the rise in long euro positions has coincided with the
widening in the spread between German and US government bond yields.
This suggests that the ECB's perceived hawkishness on the back of
rising inflation has driven much of the strength in the euro.

But the interest rate spread between German and US rates and EURUSD
look like they might be pulling back a little as we start the new
week. We will hear more from the Fed this week at the January FOMC
meeting that concludes this Wednesday. Any sign that the Fed is less
dovish than the market thinks may see a swift reversal of long EURUSD
positions as traders readjust their relative interest rate
expectations.

EUR/USD, German-US 10-year bond yields and CFTC speculative long
EURUSD positioning.
*EURGBP*: this cross is less at risk from a pull back in our view.
In contrast, the spread between German and UK 10-year bonds haven't
widened as much, and EURGBP hasn't experienced as sharp an up-move –
it has risen 2.5% this year, vs. EURUSD, which is up more than 5 per
cent.
Thus, if UK GDP for the fourth quarter, released tomorrow at 0930 GMT,
is below the 0.5 per cent the market expects then we could see EURGBP
extend its gains, as the market starts to price out early rate rises
by the Bank of England.

EURGBP (purple line) and German-UK 10-year government bond yields
The Aussie: Fundamental supports start to erode.
Flood damage and a reduction in inflation pressures is taking the
pressure off the Reserve Bank of Australia (RBA) to hike rates. This
is weighing on the Aussie, especially versus euro. This is no
surprise, for most of last year the Aussie was the strongest currency
and the euro was the weakest, as we start 2011 we are seeing some of
these themes reverse.

The reduction in the interest rate differential has sent the spread
between German bunds and Australian government bond yields surging
(although they remain negative) from -3.6% to -3.06%. This marked the
bottom on EURAUD.

We would warn that any dovish comments from the ECB/ hawkish ones from
the RBA could see EURAUD to reverse. However, the recent break higher
could see back to the 1.40 zone.
German- Aussie bond yield spread (white line) and EURAUD (yellow
line).

*AUDUSD*: less of a trend forming
This cross is stuck in a range, and correspondingly we have seen less
movement in the spread between US and Australian bond yields. So until
we see a break out in the spread – either above -1.8% on the upside,
or -2.2% on the downside – AUDUSD is unlikely to move too far.
US-Aussie bond yields (white line) and AUDUSD (yellow line)
Source: ActionForex.Com