What a start of the week for the euro and the pound, as we saw both currencies aggressively rally over 400 points during the day! The move came on the back of an appetite for risk returning to the markets, following better than expected existing home sales out of the US and news that Barclays bank won’t be needing more funds to sustain its status! Traders were a little bit more positive yesterday, however in such current economic conditions, a bullish day can reverse in matter of minutes.

The EUR/USD broke important resistance levels of 1.3060 yesterday, climbing even higher towards 1.32. This morning's better than expected IFO news saw the euro continue to rally against the buck towards 1.3350, however, the move was not strong enough to sustain further gains and as the pair appreciated more than 500 points in the last two days, a retracement was unavoidable! As long as the pair holds 1.30 for now, there might be further upside in the coming hours. A clear break of 1.30 ahead of 1.2960 may indicate that the party is over for euro bulls and another try on the downside may be in store!

The pound had a good start of the week also, after GBP/USD dropped down to 1.35, which as we said was a good psychological level and also a good support. Better news out of UK boosts the pound immensely, sending the pair towards 1.42 early this morning. As with the euro though, the move was too much too soon and therefore a nice retracement is now underway. The question is if there will be further upside for the UK currency and that depends solely on the next set of economic data and if 1.40 hold for now. A clear break of the later level may put the pound into further pressure towards 1.39.

Today's economic calendar had the German IFO report on Europe, which was slightly better than the previous month, however with current accounts printing a really negative number, many investors are more wary of any good news. CBI retail sales also came out of the UK and again we saw an unexpectedly better number giving the pound a long-awaited boost. Later on today we have the US's consumer confidence report and it will be interesting to watch what the number will be, especially with high unemployment and negative payroll numbers hitting the economy daily.

Later on in the week, traders will concentrate on the FOMC meeting and their decision regarding the interest rates. It will be interesting to hear what Bernanke has to say about deflation dangers in the coming months! The big news this week will be the US GDP and market participants will monitor the outcome for further insight on the deteriorating economy. With the new Obama administration now in motion, we are anticipating new developments in the economic field and if the GDP numbers show bigger contraction than expected, the mission will become nearly impossible over the coming months!

In other markets, we saw the DOW JONES and NIKEI gaining overnight, following by better earnings for banks and corporations, therefore giving investors some kind of reassurance that conditions may start to stabilize. One thing I have noticed though, talking to other traders around the world, is that when markets rally these days, we don’t feel optimistic anymore but feel even more wary and analyse what the rally means and when the sell off will occur! It is difficult to fall in love with a market rally and it always feels right to sell on highs until we have solid proof the rally will be justified and sustain itself.

Let’s see how the markets will react after the New York opening and if yesterday's optimism fails to impress traders ahead of tomorrow’s FOMC meeting.

Historical Economic Charts

German IFO