Dollar's rebound extends in early US session on the back of further weakness in commodities. Gold takes out 1000 level and dips to as low as 996.3 while crude oil also falls through 70 level and reaches as low as 69.1 so far. Dollar index is back above 77 level and is set to take on 77.24 near term resistance. The greenback is also lifted as traders are paring short positions ahead of Wednesday's FOMC announcement. There were some speculations that Fed will hint on withdrawal from quantitative easing measures in the accompanying statement.

As noted before, the dollar is trying to draw support from 75.89 key support level and the development will very much depend on that on gold and crude oil. It now looks like that gold has topped out in near term ahead of 1033.9 key resistance and further pull back in the precious metal will provide additional support to the greenback. Whether dollar can stage a sizeable rebound will be subject to whether crude oil will finally take out the medium term trend line support to confirm that it has topped out at 75.0 earlier in August.

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Looking at the dollar index again, we're holding on to the view that the five wave sequence from March high of 89.62 is near to complete, if not completed. 75.89 key support is expected to hold. Break of 77.24 minor resistance will be the first alert that dollar index has bottomed out and further break of 78.92 resistance will confirm this case by having the dollar index sustains above falling channel resistance. Our medium term view is unchanged too. Price actions from 88.4 are treated as three wave consolidation to larger up trend from 70.07. Nevertheless, whether this view is correct or not, a break of 78.93 should pave the way for strong rebound to 81 level.

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Elsewhere, the oversold sterling is trying to recover against dollar and euro. GBP/USD is pressing an important head and shoulder top neckline support and might consolidate for a while in near term first. Such development might drag EUR/GBP lower a bit to digest recent sharp rally. But the overall outlook in pound remains bearish and we'd expect further weakness down the road.

In BoE's Quarterly Bulletin, the bank said that savers in surplus countries may become more reluctant over time to invest funds in deficit-country government bonds and that would probably raise borrowing costs in deficit countries. That is, bond yields in deficit countries like UK and US may rise. UK's trade deficit was narrowed since hitting a record in September 2007, thanks to depreciation in the pound. The bank said that such depreciation maybe a part of a more prolonged process of rebalancing of the UK economy, generating a fall in the long-run sustainable real exchange rate.

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On the data front, UK Rightmove house price rose 0.6% mom, dropped -1.5% yoy in September. Canadian international securities transactions dropped sharply to 0.35b CAD in July. US Leading indicators rose 0.6% in August.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.4656; (P) 1.4702; (R1) 1.4755; More

EUR/USD's break of 1.4640 minor support indicates that a short term top should be in place at 1.4765 on bearish divergence conditions in 4 hours MACD and RSI. Intraday bias remains mildly on the downside and further pull back should be seen towards 1.4500 support and possibly below. On the upside, above 1.4765 will indicate that pull back has completed and recent rally has resumed. Nevertheless, we'll continue to look for further loss of momentum and reversal signal as EUR/USD approaches 1.4867 key resistance level.

In the bigger picture, there is no change in the view that rise from 1.2456 is the third leg of the whole consolidation pattern that started at 1.2329. Such rally should be near to completion with current rise as the fifth wave in the five wave sequence from 1.2456. Upside should be limited by resistance zone of 61.8% retracement of 1.6039 to 1.2329 at 1.4622 and 1.4867 and finally bring reversal. On the downside, below 1.4177 support will be an important signal that EUR/USD has already topped out and break of 1.3747 support will be the confirmation. In such case, deeper decline should be seen that sends EUR/USD through 1.2329 low eventually.

EUR/USD