The most important day of the month is here, with FOMC meting just a few hours away. Yesterday we had a relatively quiet day with pound the only currency with the most volatility as it kept rising all across the board due mostly to GBP/JPY, as carry traders are back!.

Today there is a lot of activity in the pairs as traders position themselves for the great event. Early in the European morning, we had ZEW economic sentiment out of Euro zone, which printed quite a bad number and caused EUR/USD to fall below important 1.47.The pair did rise just after the London market opening and hit 1.4750 where it found willing sellers that took the pair right down. It will be certainly interesting to watch more European data, as the risk of further deterioration in the Europe area is big and therefore that could put pressure in ECB old time hawk Mr Trichet. If the news continues to disappoint, analysts will predict that the bank will have to start thinking twice about its lets fight inflation recent stance! The question, is will ECB be pressured to start easing rates as well? Well the data will show how the economy is performing so until then everything is possible.

However, let’s not forget that the market’ s attention is only in one thing today and that is later tonight in what will happen with the FED. The main question, is will the FED give in to the markets expectations for a cut? All data and situations lately show that they will have to cut at least by 50 points until the middle of next year. However, the fact that Bernanke was so adamant in the past when it came to easing, leads many to believe that they might cut once by only 25 points and then stop. All scenarios are on the table with the more extreme ones to even suggest that he might not cut today but instead be dovish for further hikes in the future.

Whatever the outcome, watch closely the market reaction, which will be choppy and volatile and after a few minutes we might actually see how everyone is interpreting all this. We believe that before the meeting we won’t see big moves in the currencies as traders are wary of the risks and they might range trade instead, looking for more clues as to what will the day bring. However, if we see any surprises during the day from any unscheduled events, then we might see some moves in the EUR/USD especially.

So, there will be interesting opportunities today what with everything that is going on, so stay focused on the economic releases and watch out EUR/USD and GBP/USD as both pairs are getting ready for big moves in the aftermath of the announcement.

We still favour sales when it comes to the pound, long term, as it is one of the most overvalued currencies in the last few moths and the financial problems that the country is facing or is starting to face, together with lower inflation numbers, makes it the best candidate for a drop back to its old levels below 2 in the coming months.

Also, let’s not forget our favorite carry traders which we see back for more blood, as they moved all yen pairs much higher, with USD/JPY threatening to take out 112, ahead of 112.50. The same thing is happening with GBP/JPY after the pair broke important level 229.30 and moved up towards 230. Have in mind that 230.30-50 would be good levels to short the pair for a quick profit; however a clear break of that level favors a deeper correction upwards towards 234. As the end of the year comes though, and more financial problems arising every day, carry traders might pair back their positions as risk aversion might hit the markets once again…