Another week starts with the EUR/USD falling sharply from 1.5625 all the way down to 1.55 after worse than expected IFO data from Germany. The fact that the number was lower than expected, together with PMI below the important 50 level, puts pressure on the Euro where a clear break of 1.55 would bring 1.5440 back in the game.

Last week we saw the Euro gaining all across the board, especially against the dollar and the Japanese yen, after the oil moved close to $140 per barrel. An article printed in the New York Times stated that Israel had some military activity earlier in the month which was immediately perceived as a war rehearsal against Iran. The news found traders buying the Swiss currency as safe haven therefore the USD/CHF fell more than 150 points, which in return made the dollar weaken against the Euro.

This week traders have one thing and one thing only on their minds: the FOMC meeting, where the dollars fate will be determined. Analysts predict that Bernanke will leave rates unchanged, but the general feeling is the statement after the decision will be hawkish due to both high inflation and comments from US officials that the dollar should be strong. However, all that is easier said than done! The question is, will Bernanke walk the walk after all the hawkish comments heard in the last few speeches? If the statement fails to hint at any rate hikes for the coming months, the dollar will be sold off all across the board; as the market doesn’t like it to be proved wrong! It will be very interesting to see the EUR/USD reaction afterwards and the outcome will either make or break the greenback.

Also this week we have Durable Goods orders which the traders will look at in order to determine the state of the economy. If the number is negative again, this will also weigh in the dollar and further weakness could be in the picture. Later on in the week, we have the GDP and new and existing home sales, which is expected to be better than last month’s figure. The latest housing data was disappointing which put further pressure on all yen related pairs, as carry traders exited their long positions and caused DOW JONES to fall more than 200 points on Friday. New fears of more US security firms declaring losses kept stocks and risky trades at low levels and this week it will be crucial to see how all these affect the FED rate decision.

EUR/USD is moving lower as from this morning and the next level to watch is 1.5480 where it may hold with good support. If the level gives way we may see further moves to the downside towards 1.5380-1.54. On the upside there is resistance at 1.56-1.5650, but a clear break of those levels puts 1.58 back in the game.

GBP/USD is trading between 1.9550-1.9750 and a clear break of those levels might give us the next direction.

The main news for the British Pound this week is the MPC meeting where King testifies in front of the Parliament for the state of the UK economy, and his plans regarding the interest rates. This speech will be very important for the pound as most analysts predict that due to high inflationary pressures, BOE could have to hike its interest rates again in the coming months. The job of King and his co-members is rather difficult as he has to manage fighting higher inflation with lower growth. It will be a question of what is more important for the economy and if the bank chooses to ignore the negative data and concentrate on high inflation, the pound may push up towards 2 in the coming months.

Let’s see though how the market will react to this week’s economic events and if Bernanke once again comes to dollars rescue with any comments due after Wednesday’s decision…