The EUR USD hit its first downside target at 1.3634 on Monday as traders continued to increase short side bets that the European Central Bank is getting ready to cut interest rates at its first meeting of the year on January 15.

Inflation reports out of the Euro Zone are expected to show that economic conditions are continuing to weaken. Traders believe that news showing inflation dropped in December is going to give the ECB room to cut rates to at least 2.5%

Since the ECB lowered its bank deposit rate in the middle of December, the Euro has lost its upward momentum ignited by the Fed’s cut to zero percent. This pair is receiving additional pressure at this time from speculation that the U.S. government will be releasing a fiscal stimulus plan. Traders are beginning to feel that the U.S. economy is in a better position to recover from the recession before the Euro Zone.

The British Pound received a boost on Monday on speculation the U.K. government will begin to guarantee asset-backed securities. This move is an aggressive attempt by the government to revive the almost frozen mortgage business. For weeks, Bank of England Governor Mervyn King has been calling for more creative ways to stimulate lending practices and the housing market. He feels that interest rate cuts alone will not be enough to help the economy recover, but rather a combination of interest cuts and fiscal stimulation. The rumor today that the U.K. government would step in a guarantee asset-backed securities has been well-received by GBP USD traders. Look for the short-term up move to continue, but do not expect the trend to turn to up for some time.

News that the U.S. government may provide stimulus to the economy in the form of tax cuts and spending is leading to speculation that the U.S. economy will be the first to pull out of the recession. This news is leading speculators to buy the USD JPY. The Bank of Japan and the Japanese government welcomed the news as it takes the heat off the strong Yen. Since the unwinding of the carry trade last year the Yen has appreciated the most out of all the major currencies. This has caused a big drop in exports, hurting Japanese electronic and auto makers. Weeks ago the Bank of Japan was threatening an intervention; now it are considering using monetary policy to fight the deteriorating economy.

The boost in oil prices sent the Canadian Dollar to its highest level in two weeks. Tensions in the Middle East have raised crude oil supply concerns. Crude oil is a major component of the Canadian economy. In addition to the higher crude oil, Natural Gas also received a lift from threats on the Ukraine by Russia. These two supply concerns along with the start of production cuts by OPEC have the makings of a strong bull market. A breakout to the upside in the energy complex should send the USD CAD hard to the downside.

Traders seeking a better return on their investments are leaving the March Swiss Franc and looking elsewhere for opportunity. Increased buying in the USD CHF also came from speculation that Obama's fiscal stimulus plan could begin to turn the U.S. economy around. Since the news is reflecting poorer economic conditions in the Euro Zone and the Swiss Banks do most of their business in that region, investors are once again expressing a long interest in the USD CHF.

The AUD USD rose on Monday as traders once again expressed an interest in higher risk, higher yield markets. Look for this upward momentum to continue as the chart pattern is suggesting there is more room to the upside. The key to maintaining the rally will be an increased interest by traders in taking on more risk. Higher commodity prices are going to have to kick in soon also. Gold especially must maintain its gains or the economy will begin to weaken. A weakening economy will increase the chance that the Reserve Bank of Australia will cut rates.

Although the NZD USD rallied on Monday, lower commodity prices continue to be a threat to the economy. Increased appetite for risk may help produce a slight rise in this currency over the short-run because of the higher yields offered by New Zealand. This is fine as long as the Reserve Bank of New Zealand can keep rates higher than the rest of the majors. Any signs of lower inflation or a deteriorating economy will put pressure on to cut rates again. This would lead to lower prices. Stay with the developing uptrend as long as traders are comfortable taking on risk.

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