EUR/USD Analysis and Forex Updates

The EUR/USD rally squeezed even higher yesterday, and is now challenging a key resistance level. Interestingly, the Dollar is weaker elsewhere, but much of this move has been about EUR strength, as EUR has also charged to impressive new highs against GBP and CHF and is even well off the lows versus the JPY. All along the curve German treasuries are yielding more than their US counterparts. The question of course is whether the EuroZone will maintain rates as high as the market expects next year. We suspect not once further signs of deflation set in, and this could hurt the EUR in the longrun. For now, we don't want to step in front of an onrushing train, but we wonder if today's FOMC meeting could provide a pivot point for at least a sharp consolidation of this rally.

There are virtually no signs out there that risk conditions are improving, and we are a bit surprised to see equities trading as high as they have recently. Most risk spreads are getting worse and worse and it feels like something must give soon. Still, it is very difficult to gauge the market's potential for movement as we are reaching the calendar year-end and all of the lousy liquidity and unpredictable action that it entails. Remember the 2004-2005 transition: EURUSD rallied strongly to record highs on the final two days of the year, only to collapse starting on the very first trading day of the year such that it was trading over 800 pips lower by the end of the month of January. We're not saying that we expect a repeat, just that the transition to a new year could provide an important pivot point across markets - especially as we have seen a year of historical market moves.

GBP and EUR can either strengthen or weaken based on the mentioned indicators. I marked for you the support and resistance levels and 1-hour time scales for the above pairs. The BOE Inflation Letter that might be released (GBP), depending on the CPI will definitely add some flavor to GBP/USD and perhaps even GBP/JPY.

• (USD) – The Building Permits will be released at 13:30 GMT, a decline of -0.3M is expected (negative)

• (USD) – The Core CPI m/m is expected to be released at 13:30GMT, a gain of +0.2% is expected (positive)

• (USD) – The Housing Starts is expected to be released at 13:30 GMT, a drop of -0.5M is expected (negative)

• Crude Oil beginning to fall after reaching $50.5 yesterday, current price at the time of this writing: $44.3

• Gold continues its march, current price at the time of this writing: $835.92

• The Nikkei 225 fell 56.50 points (-0.65%) to 8,608.16 points

• The Australian S&P/Asx slipped 50.00 points (1.39%) to 3,541.40 points.

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