The unexpected growing of the Japanese Q2 GDP by just .1% has increased the dovish market sentiment as the markets were waiting for it to be .6% in the beginning of this week after weak closing of the US equities markets putting pressure on the treasury yields after the Fed's decision last week to step forward in its quantitive easing policy buying Mortgage backed securities and to roll over the Federal Reserve's holdings of Treasury securities as they mature could affect negatively on the market sentiment and the risk appetite of the investors who were waiting for holding for keeping the trust in the markets which were not waited from the fed to move over the near term which means that the Fed may have more than modest recovery performance worries which added to the pessimism about the growth outlook in US and worked in the opposite direction as the double dip recession possibility in US could contain the market sentiment driving the investors to prefer taking the safe side squaring their risky positions buying back the low yielding currencies as the Fed used softer language than even its previous meeting when it has highlighted its worries about the growth flattering unworried about the inflation pressure but it looks now that that was the smoothing of the easing action of last week before the deterioration can have further negative impacts on the consuming and capital spending and to inform the markets that the fed will not stand seeing the economy falling back in a second dip recession with no action even with the interest rate near 0%.

The markets are still watching closely USDJPY at this critical level which can trigger interventions by BOJ as it is hard to relinquish to the demands for watching its currency strengthening amid increased probability of having further persisting deflation forces can come out to it this time from US and EU too after weak labor data forced the Fed to go further into its accommodative policy stance and weakened interest rate outlook triggering unwinding of the carry trades supporting the Japanese yen hurting the Japanese economy which depends on its exports, in a time of an expected consuming weakness from US and also cooling growth tries in China which has increased worrying about prices currently as we have seen it last week calling for banking stress test suggesting declining of the housing prices by 60% which is the double of what was initially made at just 30% and it has obeyed for demand for further re-evaluation step used to be named gradual action by PBOC after it has actually reduced the banks lending percentage to their capitals from the beginning of this year which worked too for the demands of cooling this overheating economy which caused prices rising risks could be appreciated finally by PBOC which can effect negatively on its demand for capitals goods from Japan and we have seen the Chinese PMI index coming down in July to just 51.2 while the Euro zone as a counterpart competitor of Japan is getting use of the EUR exchange rates which is trading currently just above 110 versus the Japanese yen and it is exposed to get down further below 110 if BOJ allowed to its currency to appreciate trading freely below 84.87 versus the greenback.

After the single currency could get above 1.33 2 weeks ago Friday touching 1.333 with the weaker than expected labor report of July release underpinned by Trichet's comments that the debt crisis negative effects on the growth in the Euro zone are easing back expecting it to be better than what was initially estimated welcoming the stress test results which calmed down the markets relatively but the market worries could revolve again by the possibility of the European following of the US growth slowdown pushing the single currency to fall below 1.28 by the end of last week and after a dovish massive closing of it to test 1.2735 before finding support again to get back above 1.28 currently the selling pressure could get strong momentum last week with this market pessimism breaking 1.3117, 1.3096 and the psychological level at 1.30 making the next major supporting levels at 1.2735, 1.255, 1.2452, 1.2165, 1.2044 and 1.1954 and 1.1875 from 1.1875 which has been reached amid the increased worries about the debt crisis and could cap the pair from falling to 1.16 whereas the pair has started its rally to 1.604 before falling again to 1.233 amid the credit crisis and rising back forming a lower high at 1.515 in the beginning of last December while the major resistances are at 1.293, 1.30, 1.333, 1.3352, 1.3415, 1.3704 and then 1.3885 which is 61.8% Fibonacci retracement level of this same recent declining from 1.5142 to 1.1874.

Best wishes

FX Consultant

Walid Salah El Din

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