USD On the Run Ahead of FOMC Minutes

Forex News and Events:
Forex markets are highly volatile as participants are slow to return from the holidays providing much need stability. Volume, along with risk appetite has picked up slightly spearheaded by USD selling however with no real news flow to test traders' commitment it's hard to extrapolate any real meaning in moves. The slightly higher US construction spending and in line ISM manufacturing has fueled speculation that global growth might continue to recover in 2011 and elevation in commodity and equity prices were clearly seen. After a day off, Asian equities broadly followed Wall Street's lead with Shanghai's index climbing 1.59% and the Nikkei up 1.65%.

Australian flooding in Queensland has been pushing commodity prices higher in recent days as local wheat crops have been damaged and coal mines have been flooded (estimated that 36% of global coal production might be effected). Inflation in the region has already been a growing concern (key theme of 2011) and the disruption in commodity supply will only accentuate fears. In other parts of the Asian region, the S. Korean President provided a very public display of concern in his first cabinet meeting that they must curb headline inflation under 3% (growth 5%) "With the thought you are staging a war against inflation?. We suspect that inflation will become a significant problem this year with Asian central banks applying further tightening of monetary policy and aggressive interventions activities (Taiwan is currently still up to its 2010 tricks). From our vantage point we suspect that higher rates and robust growth will provide ample Asian FX opportunities from the long side despite official activity.

In Europe, despite China's positive comments on their support of European sovereign debt, peripheral CDS prices continue to tick higher with Greece's 10 yr now only 150bp off its all time high (40bps below Venezuela which just devalued for the second time in 12 months). Given the thin volumes still dogging EURUSD we are more likely to play the ranges than try to hit a directional move and will be looking for opportunities around the 1.3430 resistance.

As for today the highlight will be the FOMC minutes. We suspect the comments will be balanced with Fed members acknowledging the moderate improvement in the economic data. However, they should also discuss stubborn weakness in the labor market and housing sector that continues to be a drag on the overall recovery. As for QE2, we suspect that members are still content with the $600bn level of asset purchases and don't see them discussing further additional cash just yet. It is possible they will however discuss the effectiveness of QE2 given the week Nov payroll reading. The realization that the economic problems in the US are entrenching themselves (not solved by monetary and fiscal bailouts) will be worrying to USD bulls, as the possibility that the US is heading towards a Japanese style "lost decade? moves closer to reality.

Today's Key Issues (time in GMT):
08:55 EUR Germany: Unemployment change
08:55 EUR Germany: Unemployment level,
09:30 GBP Manufacturing PMI, index Dec 57.0 exp
09:30 GBP Net consumer credit, bn 0.2 exp
09:30 GBP Mortgage lending, bn 0.8 exp
09:30 GBP Mortgage approvals, 47.0 exp
09:30 GBP Money supply,
10:00 EUR "Flash" HICP, 2.0 exp
15:00 USD Factory orders -0.1 exp
19:00 USD FOMC minutes
The Risk Today:
EurUsd EURUSD has managed to remain elevated in the past day, and we now feel more confident applying a 1-2 week uptrend channel to the recent price action. Of course, we have not forgotten how fickle and short-lived the trends have tended to be during the past month, so it's worth waiting to see whether this uptrend can tackle the overhead levels of 1.3425 (Friday's high) and 1.3498 (14 Dec high) before calling an end to the broader bear market. If the bulls can indeed manage to break above that 1.3498 level (and the psychologically important 1.3500 landmark), the key resistance levels above are eyed at 1.3635 (last seen 22 Nov), 1.3785 (22 Nov high) and 1.3825 (10 & 11 Nov highs). Should the broader bearish trend resume, support is noted at 1.3290 (1-2 week uptrend support), 1.3250 (yesterday's low), 1.3085 (the crucially important 200-day moving average and 28 Dec low), then at 1.3060 (2 Nov low), 1.2972 (30 Nov & 1 Dec low), 1.2922 (pivot from early Sep), 1.2830 (14 Sep low), and 1.2645 (10 Sep low).
GbpUsd It's been a choppy past week for GBPUSD, but with public holidays in the UK and abroad now out of the way, extra liquidity may make conditions a little smoother. After surviving the dip to 1.5434 lows yesterday, we have since recovered back above 1.5550, and there are now no discernible resistance levels ahead of 1.5665 (Friday's high). Our view is that a mildly bullish bias is still appropriate for this pair (a couple of bullish engulfing candlesticks have been emerging on the daily chart in the past week), and it's likely that yesterday's downward oscillation was wildly exaggerated by the lingering holiday season liquidity. As such, we'd prefer to be buyers on dips, noting support at1.5357 (22 Dec low), 1.5297 (7 Sep low) and 1.5122 (21 Jul low). Resistance on the topside resides at 1.5665 (Friday's aforementioned high), 1.5770 (seen 15 Dec before the big sell-off), and 1.5910 (14 Dec high).
UsdJpy There's been a sharp squeeze higher in USDJPY over the past 24 hours, and we now find the pair looking to challenge the 82.35 neckline of the double top formation currently in play. As a reminder, double top pattern was activated by a break below 82.35 on 28 Dec, and has a target below at 80.30 (calculated as the height of the tops to the neckline, subtracted from the neckline). The area between 82.35 and 82.55 (22 Dec late rebound high) is likely to be a prime area for sellers to try getting in on the missed opportunity to play the double top pattern, so expect that zone to be a sticky one to surpass. Should we break above 82.55 then the double top will likely be negated and next levels are not eyed until 83.40 (23 Dec spike high), and the 84.40 former range ceiling. Barring intervention from the Japanese authorities, it's entirely possible the pair returns to re-challenge its lows. Next supports lie at 80.95 (Friday's low) and 80.60 (strong support from the beginning of November), but really that's all we have to contend with ahead of the 80.30 target. Just below that level lies 80.24 (31 Oct low), and then the all-time low from 1995 at 79.75 �so watch out for a lot of buyers lurking down there.
UsdChf USDCHF has squeezed steeply higher this morning; unsurprising considering the market's probable short positioning since hitting new all-time lows of 0.9301 on Friday, and the impending major data event on Thursday (Swiss CPI at 08:15 GMT). Obviously the 1-month downtrend channel is still intact so we much prefer playing this pair from the short side than the long side, but currently levels do not look that appealing for new trade entry. The key technical levels on the downside come in at Friday's 0.9301 low, then the lower edge of the downtrend channel, seen at 0.9240. Below that, we'll be relying on merely psychological supports such as 0.9200, 0.9100 etc. First resistance on the topside is now 0.9435 (former support now turned resistance), 0.9510 (upper edge of the downtrend channel), 0.9533 (29 Dec highs), 0.9665 (spike high from 23 Dec), and 0.9735 (16 Dec high).

Source: ActionForex.Com