News and Events:

With no major economic data today, worries and debate over the US 's credit outlook and optimism surrounding the Eurozone's economic data will provide traders with a choppy, directionless trading day. The migration from risk aversion trading to the examination of fundamentals was tested by new missile tests from N. Korea. Local news agency reported that N. Korea successfully tested an underground nuclear weapon followed by a firing of a short range missile. The knee jerk reaction was the selling of JPY to 95.20 against the USD while the EURUSD was flat. The failure of the USD to see broad based buying supports the theory that risk aversion will play a smaller role in the greenback's fate moving forward. Last week we saw the correlations between the EURUSD and S&P continue to decouple while the main focus in USD trading has shifted to domestic fiscal and inflation fears. Last week's suggestion that the US could lose its AAA credit rating (and S&P downgrade the UK outlook while Moody's and Fitch reiterated their stable outlook) hurt the USD and shifted the debate to fundamentals. The debate made it to the White House over the weekend, with spokesman Robert Gibbs stating (without any details) that the US converted rating is not under threat. We would expect nothing different from the administration and will be watching closely to the markets real reaction intenders for the Fed's reverse auctions, which now suggest an increasing unwillingness to hold on to US government debt. Treasury auctions will be held this week and their sustained success will be significant for the USD outlook as the results will also highlight the condition of external demand. Markets will also increase speculation around China and its commitment to funding US spending. In our view China would be more than happy to find otherlocations to park capital but in reality US sovereign debt is really the only option. First of all, the US government debt market is the only one deep enough to handle China 's foreign reserves. And second, since no political union in the Eurozone exists, the value of the EUR cannot be guaranteed by a single controller. Overall improving global fundamentals are ideal for commodity currencies such as the AUD, NZDand CAD as commodity prices rallied last week.In addition,better economic data out of Australia and New Zealand in recent weeks have supported buyers. In European trading, German May Ifo business climate index failed to live up to expectations printing at 84.2 vs 85.0 exp.



Forex-Chart

Today's Key Issues (time in GMT):

00:00 EUR Public holiday

08:00 EUR IFO current assessment, index May -2.2 exp, -2.1 prior

08:00 EUR IFO business climate, index May 84.8 exp, 83.7 prior

08:00 EUR IFO business expectations, index May 84.3 exp, 83.6 prior

10:00 Bundesbank President Weber speaks on End of the financial crisis - a turn in the economic development?

14:30 EUR Israel BoI interest rate announcement, % May 28 0.50 % exp, 0.50%

18:00 JPY ECB's González Parámo speaks at Club Siglo XXI in Madrid

23:50 Corporate Service Price Index, % y/y Apr 85.5 exp, 83.9 prior

The Risk Today:

EurUsd Strong bullish price action that started last week posts gains of more than 600pips in 1 week, momentum slows for now but target is still higher. Culminating at 1.4050 the move is currently retracing, while 23.60% retracement level stands at 1.3901, determining how much this pullback is down to the slight return of risk aversion due to the N.Korean nuclear tests remains to be seen. Initial support can be seen at 1.3930 with a daily floor at 1.3809. Bias continues to be to the upside with initial resistance at 1.4000 however, a re-test at 1.4050 will be crucial pivot and push higher, daily moves capped at 1.4211.

GbpUsd Momentum slows as dollar gains on risk fears. Initial support at 50.00% retracement at 1.5870 with crucial level at morning's low of 1.5836. Daily floor in at 1.5756. On the upside 1.5900 will mark tentative attempt for the upside, key level at last week's highs of 1.5941 - 1.6045 marking broad scale 38.20% retracement on move that took us from 2.0144 to 1.3512.

UsdJpy Yen weakens on N. Korean concerns, breaking past 95.00 and continues to be constructive under 100.00. We see a consolidation of current moves as we trade around the 95.00 mark; expect further upward pressure aiming for 95.25 (May 21st high and level we tested once this morning. Push past this level will set sights on 96.70 via 95.61.

UsdChf Strong Swiss franc shrugs off recent suspected SNB intervention and continues to push lower. While 23.60% retracement stands at 1.0917 we could see a weaker than expected retracement as momentum remains strong. Initial resistance at 1.0872. On the downside signs point to further swissy gains, aiming for 1.0839, with crucial level at 1.0811.

Resistance and Support:

EURUSD

GBPUSD

USDJPY

USDCHF

1.4211

1.6045

96.70

1.0984

1.4050

1.5941

96.61

1.0917

1.4000

1.5900

95.25

1.0872

1.3972

1.5848

94.95

1.0860

1.3930

1.5870

95.00

1.0839

1.3901

1.5836

94.70

1.0811

1.3809

1.5756

94.54

1.0701

S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot