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Price action in the US session thus far has been quite choppy with the market taking time to absorb the latest ECB and BoE non-standard measures along with separate comments from Fed Chair Bernanke on US monetary policy and the banking system. US equities are finally seeing some pullback with market participants seemingly content on booking profits after a strong multi-week rally. This could start weigh on the outperforming Aussie.

MIDDAY SNAPSHOT & ANALYSIS OF SELECTED RATES

Price action in the US session thus far has been quite choppy with the market taking time to absorb the latest ECB and BoE non-standard measures along with separate comments from Fed Chair Bernanke on US monetary policy and the banking system. Although both rate decisions were as expected with the ECB cutting rates by 25bps to 1.00% and the BoE leaving rates unchanged at 0.50%, the market had plenty to absorb after the Bank of England announced that it was ramping up its Asset Purchase Scheme (APS) by GBP50B, and Trichet announced that the ECB would provide enhanced credit support through the purchase of covered bonds. Trichet however made it quite clear that the ECB would not adopt a quantitative easing approach and that inflation expectations were firmly anchored. The ECB credit enhancement is scheduled to start on June 23. The FX market at this time, has warmed up more to the ECB policy with the Euro tracking higher on the day while the Pound trades to fresh lows. Eur/Gbp price action has been heavily influenced as a result, with the cross rate surging by more than 1.20% thus far to put in a bullish outside day. Fed Chair Bernanke has also been on the wires with no real market moving comments but does say that banks should build up capital in good times to be able to deal with the bad while also being able to properly assess the unintended consequences of any new products. Bernanke adds that there is little inflation risk in the near-term. On the data front, the key release was initial jobless claims which came in better than expected. US productivity was also slightly better. US equities are finally seeing some pullback with market participants seemingly content on booking profits after a strong multi-week rally. Commodities are higher with oil above $57 and gold trading $912.

ANALYSIS OF SELECTED RATES

Aud/Usd: Today's pullback in US equities is significant given the extremely high +0.76 correlation since the beginning of 2009. As such, we feel it might be time to start looking for a potential pullback in the outperforming commodity currency in light of the latest equity developments (S&P and DJIA down over 1% today). The currency pair is now just under 70 on the daily RSI and also stalling out by the most relevant weekly moving average, in the form of the 50-Week SMA which now acts as former support turned resistance. As such, we think that the higher yielding Aussie could be at risk for a material pullback over the coming weeks and bulls should start to think about booking profits, at least in the short-term.

Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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