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  •  Two conflicting outcomes from the ECB weigh on the euro
  •  The US fails to convince Germany to back-stop the Eurozone
  •  Ones to Watch: Gold

There has been some strange goings on in the markets. Just last week we could predict a risk-on/ off environment with the euro and stocks moving higher at the same time as the dollar declined post those now infamous Draghi comments. However, today the euro has gone back to being the funding currency of choice, with stocks rising along with the Aussie and other commodity currencies and Spanish and Italian bond yields falling. Even more interesting is that gold is also falling and not joining in with the broader market rally.

Two conflicting outcomes from the ECB weigh on the euro

So what is current price action telling us as we move towards the central bank fest later this week? The euro could be selling off for two reasons: 1, some people may expect a disappointment from the ECB when it meets on Thursday after Draghi promised big things (still unidentified) at a conference in London last week. 2, The euro may also be selling off because they expect some sort of rate cut from the Bank, and when interest rates fall this can weaken a currency's value.

Thus, the euro could be falling because people expect the ECB to do nothing, but also because they expect the Bank to take action? It sounds like a contradiction and it highlights just how complicated it is to trade EURUSD post those Draghi comments. Essentially we think a rate cut isn't the right type of action the markets want from the ECB. The investment community is likely going to want the ECB to be the financial backstop to the euro, or the lender of last resort, by committing to either purchasing unlimited quantities of Spanish and Italian debt or by granting the European rescue funds banking licences so that they can buy the debt instead. Thus, the markets seem to be pricing out some of last week's optimism and instead gearing themselves up for a disappointment, which is euro negative in the short-term. In EURUSD, below 1.2220, the Tenkan on the daily Ichimoku cloud, opens the way for a re-test of 1.2040 - the low from last week. The near-term resistance level of note remains 1.2330.

The movement in gold is interesting as it rallied hard post Draghi's comments. It jumped nearly 4% last week on the back of expectations that global central banks would flood the markets with money, however, it is giving back some of the recent gains today as expectations of CB stimulus get scaled back. Thus, if the markets start to think that central banks will leave them high and dry then gold could be in for further losses as it tends to move lower if central banks keep the taps firmly turned off. See our one to watch below for more.

The US fails to convince Germany to back-stop the Eurozone

The meeting between US Treasury Secretary Geithner and German Finance Minister Schauble held talks today and even delivered a joint statement that said nothing new and gave no hope that the US had persuaded Germany to accept the massive amounts of debt mutualisation that is needed to save the euro. Although the statement was particularly anodyne one can imagine the discussions between the two were livelier as the US gets sick of the on-going Euro crisis threatening its economy especially during an election year.

The most interesting thing this week will be the outcome of the ECB meeting, in our view, especially now that Draghi staked his credibility on delivering some sort of official support for Spain. How Draghi convinces the Bundesbank contingent to play ball could determine the outcome of this crisis once and for all.

Data Watch:

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One to Watch: Gold

As mentioned above, if the markets continue to price out expectations of central bank action at the meetings scheduled for this week then we could see the gold price start to falter. Good support lies at $1,615 - the 100-day sma. Below here there are a couple of important support levels to watch. The first is $1,602 - the top of the Ichimoku cloud. Below here suggests the end of the technical downtrend and a loss of upward momentum. That could point to further losses. The next support of note below this key level is $1,590 - the 50-day sma. These are levels to watch out for in the next few days. Resistance lies at $ 1,630.

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Source: Forex.com

Best Regards,

Kathleen Brooks| Research Director UK EMEA | FOREX.com

d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e: kbrooks@forex.com| w: www.forex.com/uk

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