EUR/USD - Euro Dollar, American Session - 10/10/08 EUR/USD - 1.3609 Daily Market Outlook - Oct 10 EUR/USD Technical Analysis 10 October 2008 More EUR/USD GBP/USD - British Pound Dollar, American Session - 10/10/08 Shock and Awe for Markets All Around the World! GBP/USD Technical Analysis 10 October 2008 More GBP/USD USD/CHF - Dollar Swiss Franc, American Session - 10/10/08 USD/CHF - Dollar Swiss Franc, European Session - 10/10/08 USD/CHF - Dollar Swiss Franc, American Session - 09/10/08 More USD/CHF

On Thursday, the European Central Bank decided to leave interest rates at 4%. This was not actually news as the market had been expecting this announcement. What the market was not prepared for was the excessively hawkish comments from European Central Bank President Jean Claude Trichet.

After the announcement, Trichet came out firing and said an interest rate increase in July is "possible." This comment caused immediate short covering as traders were forced to cover new shorts placed earlier in the week.

While Trichet was stating that policymakers are in a state of "heightened alertness" over inflation, traders were erasing the gains in the Dollar, which were accomplished earlier this week following hawkish comments by Fed Chairman Bernanke.

The statements from Trichet and Bernanke indicate that inflation is a clear and present danger. With the ECB holding the edge over the Fed as far as interest rates are concerned, look for the Euro to firm over the short-term and the pair to trade sideways-to-higher.

Since the top on April 22, the EUR/USD has traded in a range of 1.6019 to 1.5283. The middle of this range is 1.5651. Expectations are for the market to retrace to this area and stabilize as it awaits some concrete action from either the ECB or the Fed.

Earlier in the week, the Fed and the Treasury talked about the level of the Dollar, and its relationship with inflation. If the ECB raises rates, the Euro is surely going to rally, as the interest rate differential will widen between the Bund and the Bond. The question will be whether the Fed is going to chase the increase by raising rates sooner than expected.

At this time, the financial markets are anticipating a hike in U.S. rates some time in December. The shrewd trader should begin to watch for clues to see if the odds shift to an increase sooner.

USD/JPY Breaks Resistance

The USD/JPY broke out of the top end of the range at 105.71, which has been holding it back for almost a month. The technical picture is clear with the charts indicating that a short-term rally to 107.39 is likely. The key support, which must hold is at 105.47 today. The weekly charts are indicating that a rally to 109.94 is possible.

The key fundamental supporting a higher USD/JPY is higher interest rates in the U.S. This is a long-term fundamental. The Fed adopting a more hawkish tone is also a factor supporting a higher Dollar versus Yen. These two factors give the trader confidence in the long side. After Thursdays rally, it is clear, however, that this pair needs the stock market to rally to trigger more aggressive buying. Without a stock market rally to stimulate the carry trade, this market would drift sideways-to-higher.