An early USD rally has abated and the markets have deferred back to consolidation mode on thelightened holiday trade.Stops below 1.2700 in EUR/USDwere targeted early on with more fears of meltdowns within theEastern European region helping to fuel the Euro selling.


An early USD rally has abated and the markets have deferred back to consolidation mode on the lightened holiday trade. Stops below 1.2700 in EUR/USD were targeted early on with more fears of meltdowns within the Eastern European region helping to fuel the Euro selling. However, after being unable to break below the latter, fresh range trade buying emerged to send the major back above 1.2800. ECB President Trichet was on the wires applauding the official response to the financial market crisis, while EU Almunia once again downplayed any possibility for a breakup in the Euro area. BoE MPC Bean was seen moving markets after saying that the depreciation in the Pound was necessary for rebalancing and that the move for the currency was the right one. Bean also said that there was a 75% risk that growth would be weaker than the main BoE base case. USD/JPY trades relatively flat on the day with any flight to safety Yen buying being offset by the uncomfortably weak data out of the region in the overnight session. On the local front, Fed Duke is getting some attention after stressing that more efforts are still needed to support the housing sector. Data released out of Canada was weaker with manufacturing shipments coming in at record 17 year low.

Eur/Chf - Has broken down through the previous weekly consolidation lows and the market now looks poised for deeper setbacks to challenge initial support which comes in by 1.4810 (2Feb low). A break below the latter will accelerate declines and expose a direct retest on the 2009 lows at 1.4650 (14Jan low) which guards against the more critical life-time lows at 1.4300 from late October. Rallies are now seen well offered ahead of 1.5000, with a lower top ultimately sought out below the psychological barrier. Only back above 1.5015 delays. 


Gbp/Aud - Volatility on the cross has been contracting over the past several days to support the case for an impending breakout in the near-term. Price action has been constructive since basing by 2.0235 in early January, with a fresh higher low already firmly in place at 2.0750 (26Jan low). With the market now testing loose rising trend-line support in the 2.1700 area, our outlook is mildly bullish, favoring a fresh higher low by the latter ahead of the next upside extension beyond 2.2880 (30Jan high). Look for a break back above Friday’s high at 2.2065 to confirm and accelerate gains. Only a close back below 1.1700 would negate.




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