EURUSD Could Be Topping Here

The dollar is range-bound in quiet
trading on the absence of meaningful economic data this morning, keeping us on
the sidelines for the session.
Overnight, the currencies we made a
play on cooperated briefly, with GBP/JPY selling off below 226 on combined
fundamentals from Japan and the UK. However, the correction took us back to the
initial entry at 226.25 for a wash. Technically, the pair looks primed for
another selloff on the perfect support turned resistance formation at 226.50.
However, with no significant economic data to move the market, 20-30 pip
volatility is the more likely scenario. On the US, front, we are seeing a
reversal in the bond market, with 10yr yields pulling higher on this week’s
services ISM and this mornings ADP job that may be foreshadowing stronger
nonfarm figures on Friday. Indeed, the Fed funds futures pricing in of Q1 cut
have taken a beating from last week’s 70-75% to about 50%. We have been
maintaining that the bond market got ahead of itself on the US slowdown story
for the last few sessions, pointing to the significance of the unemployment
picture and Q4 GDP in determining FOMC bias. All of this bodes well for the
dollar which still appears to be bottoming against the majors and continues to
rally against CAD.

EURUSD continues showing signs of gradual topping as the US
markets are slowly readjusting their assessment of the Fed funds futures. The
reason we maintain a Neutral outlook is tomorrow’s ECB decision and expected
hike, which, although priced in, can result in a euro rally if Gov. Trichet
makes any hints over the direction of ECB policy in Q1. Our suspicion is that
the bi-monthy tightening pace is not sustainable and concerns over the extent of
European recovery may be raised sooner than later.

Short Term: Neutral

Medium Term: A test of 1.30 confirms dollar bearish
accumulation and should be maintained above that level on further deterioration
of interest rate differential

GBPUSD is also confirming our assessment of overbought
conditions, falling below the unsustainably steep trendline support. Aside from
the weakness in UK Industrial and Manufacturing data, tomorrow’s BOE decision is
also likely to play a role in sterling’s relative decline among other European

Short Term: Bearish

Medium Term: A re-awakened central bank has diminished the
likelihood of a reversal in the medium term.

USDCAD is also behaving along the lines of our projections.
Yesterday, we stated that the expected decline in PMI should keep the upward
pressure on USDCAD, which is precisely what we are seeing this morning.
Technical downward pressure still exists in the 1.1480/1.15 range, but the
shifting bias for dollar recovery is priming a breakout.

Short Term: Bullish

Medium Term: Looking for sustained move above 1.15 for a
target level of 1.18.

is the fund manager at Black Flag Capital Partners and Chairman of
the firm’s Investment Committee, which oversees research, investment and
trading strategies. You can find out more about Jes at
to organizing the hedge fund he was hired by MG Financial Group to help
run their flagship news and analysis department, After four
years as a senior currency strategist he went on to found – a research firm catering to professional traders.