The Euro remains well bid into Wednesday and although Wednesday’s are traditionally good days for reversals, we certainly could also not rule out the possibility for additional upside towards next key topside barriers by 1.3745 and the 1.3985 further up. The outperformance in the Euro has been driven on a less downbeat assessment of the local economy with the latest successful EFSF auction helping to fuel additional bids.

Currencies in general have been broadly bid against the buck, although we have seen some relative weakness in the Pound following Tuesday’s disastrous GDP reading. The much softer data has done a good job of quashing any expectations that hawks may have for a near-term rise in rates, even with some concerning inflation numbers. Performance on the commodity bloc has also been unimpressive, albeit not as bad as Sterling, with both the Australian and Canadian Dollars faltering of late on some softer inflation readings. Elsewhere, the Yen and Swissie have been well bid, with the Franc trading just below its record highs against the buck, and the Yen rallying back above the daily Ichimoku cloud top (USD/JPY below the cloud bottom).

The key event risk for the day is unquestionably the Fed rate decision due out at 19:15GMT and we expect that the market will start to position accordingly ahead of the FOMC. While no change to policy is expected, as has been the case in recent decisions, the market will pay very close attention to the accompanying statement for any clues in the direction of future monetary policy. Any indication of a more upbeat outlook than expected will most probably serve to benefit the Greenback as market participants price in the eventuality of less accommodative monetary policy.

Looking ahead, German import prices (1.2% expected) are due at 7:00GMT, followed by the Bank of England Minutes and UK BBA loans for house purchases (29250 expected) at 9:30GMT. US equity futures and commodities prices are tracking moderately higher in early Wednesday trade.

TECHNICAL OUTLOOK

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EUR/USD:The recent break back above 1.3500 has signaled a shift in the short-term structure and now potentially opens the door for additional upside over the coming days back towards the 1.4000 area. Next key topside resistance comes in by 1.3745 (61.8% of Nov-Dec move, while above exposes the 78.6% fib retrace off of the same move at 1.3985. Overall however, our core bias remains net USD bullish and as such, rallies to 1.3985 this week will be aggressively sold. In the interim, a break and close back below 1.3540 will be required to relieve topside pressures.

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USD/JPY: The market appears to be locked in some consolidation with clear directional bias not easily determined. The latest rally has stalled out by the Ichimoku cloud top to suggest that the pressure still remains on the downside for now. Back below 82.00 should accelerate declines and expose the multi-year lows from 2010 just ahead of 80.00, while back above 83.70 will relieve downside pressures and shift structure back to the topside. In the interim, we remain sidelined and await a clearer signal.

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GBP/USD: A major bearish reversal day on Tuesday could now confirm a fresh lower top in place by 1.6060 ahead of the next downside extension. Tuesday’s break and close back below 1.5840 helps to strengthen bearish bias, and from here, we look for any intraday rallies to be well capped ahead of 1.5900 in favor of a drop towards next support by 1.5665 further down. Only back above 1.6060 negates.

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USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. Look for the current setbacks to be well supported on a close basis above 0.9400 (see 78.6% fib of record Dec low to Jan high), with a fresh higher low sought out ahead of the next major upside extension beyond 0.9785.