It's been a wild ride in the markets today from anyone's perspective; most notably the equities meltdown on Wall Street… … thanks to the panic surrounding the failure of Lehman Bros. and the potential failure of the insurance giant AIG.

Speculation is raging with the “too big to fail” mentality so my
question is “Why is the Fed involved?” Trader's note that almost lost in the
day's action is Oil dropping below the psychological $100/BBL price level to
finish the day in the $95 handle. Although most analysts agree a price fall
in Oil is welcome the jury is still out as to how much this represents a
panic liquidation by traders to meet financial obligations elsewhere or just
outright fear by the longs. In the case of the USD, the Greenback has
suffered huge volatility the past 24 hours and more is expected as the
closed-door negotiations continue on possible bail-out options available for
the financial markets. To end the day the USD is mixed, marginally higher
against GBP and EURO while ending lower against Yen and Swissy. Traders note
that after the initial panic long-liquidation seen overnight Asia the USD
stabilized and traded within tight ranges during New York. Also noted were
the lighter volumes and patchy order flows as stops were cleared both ways
intra-day leaving traders willing to sit on their hands until more data is
known. GBP traded to a high print at 1.8130 overnight before dropping to
trade the 1.7900 handle for most of the day; cross spreading for EURO and
Yen was heavy and the GBP will likely see more whipsaw near-term. EURO also
rallied hard in Asia for a high print at 1.4482 before falling back as well;
ending the day around the 1.4200 handle after posting lows in New York at
1.4083 as the opening panic continued to spook traders. For the most part,
the speculation that the Fed will need to cut rates unexpectedly tomorrow
helped hold the USD on the softer side as late longs bailed during early
Monday's trade. In my view, today's market environment and near-term
volatility is a once-in-25-year event. Wise traders will make use of this
volatility carefully but if the continuing financial crisis continues to
unfold with the current level of panic the fortunes of the USD do not look
bullish in my view. Look to buy dips in the GBP and the EURO the next day or
so as the Greenback will likely continue to fall; most likely hard against
the Yen in my view.

GBP/USD Daily

Resistance 3: 1.8200/10

Resistance 2: 1.8130

Resistance 1: 1.8080

Latest New York: 1.7993

Support 1: 1.7760

Support 2: 1.7620/30

Support 3: 1.7580

Comments

Rate explodes to the upside and runs all bids out; falls back to open lower
in New York. Buy dips is the preferred strategy in my view. Cross spreaders
seen active on the sell side but volumes lighter. Rate two-way but firm on
dips; traders note bids still absorbing offers on the breaks. Traders note
stops mixed with offers above the market also. Major support has held last
Friday, any weakness likely to be bought hard. Profit-taking bids continue
as well. Hook reversal from the toolbox still valid. Price drop today likely
over-extended on sympathy selling from EURO. Drop is drawing profit-taking
bids suggesting the bottom is finally trying to form near-term.
Short-covering rally may be over due to sharpness of the move. Likely an
exhaustion drop. Close back above the 1.7780 area needed to take some of the
pressure off.

Data due Tuesday: All times EASTERN (-4 GMT)

4:30am GBP CPI y/y

4:30am GBP Core CPI y/y

4:30am GBP DCLG HPI y/y

4:30am GBP RPI y/y

Tentative GBP BOE Inflation Letter

EURO/USD Daily

Resistance 3: 1.4550

Resistance 2: 1.4380

Resistance 1: 1.4250

Latest New York: 1.4293

Support 1: 1.4080

Support 2: 1.4000/10

Support 3: 1.3940/50

Comments

Rate rallies hard, some sympathy trade from GBP; lows likely in finally from
last week. Bids are supporting on dips. Bounce out of the drop on better
volume traders say, lots of stops from shorts seen overnight as well as
panic bids. Two-way trade and whipsaw result in increased volatility. Stops
Friday suggesting bottom-picking is still being tried by early longs.
Traders report offers in size being absorbed. Traders suggesting that the
rate is trading technically. Market is continues heavily short now so expect
a further leg higher. Rate continues to track Cable and vice-versa. Now that
more stops are cleared a rotation higher is even more likely. US data this
week likely to be unfriendly so be ready for more whipsaw.

Data due Tuesday: All times EASTERN (-4 GMT)

2:00am EUR German Final CPI m/m

5:00am EUR CPI y/y

5:00am EUR ZEW Economic Sentiment

5:00am EUR Core CPI y/y

5:00am EUR German ZEW Economic Sentiment

Analysis by: http://www.Forexpros.com – Written
by Jason Alan Jankovsky

Disclaimer:

Trading Futures and Options on Futures and Cash Forex transactions involves
substantial risk of loss and may not be suitable for all investors. You
should carefully consider whether trading is suitable for you in light of
your circumstances, knowledge, and financial resources. You may lose all or
more of your initial investment. Opinions, market data, and recommendations
are subject to change at any time.