The USD is on the offensive this afternoon although volumes are light and trade seems driven by rhetoric and technical… … factors.

Traders remain nervous over the delay in passing the bailout bill and adding insult to injury today's testimony by Paulson and Bernanke on Capitol Hill has been largely a
repeat of yesterday's discussion suggesting that legislator's are dragging
their feet or just plain need to have something told to them twice. Equities
have been two-sided as have been traditional hedges such as gold and bonds.
Traders note that if much more “talking” instead of “acting” were to
continue then investor confidence may begin to turn south. GBP continued to
trade within existing ranges but had a sharp break lower mid-day as the USD
had a rally late; low prints at 1.8474 are still a healthy 10 handles off
the lows but the charts are looking a bit bearish this afternoon. EURO
suffered the same breaking back to new lows in New York trade for a low
print at 1.4628; traders note that stops were triggered on new lows in both
pairs suggesting that late longs were buying dips. USD/JPY tried for a new
high but has encountered strong resistance at the 106.20/30 area as the pair
rallied back from low prints in New York at 105.34 to trade 106.10 late in
the day. This kind of whipsaw is to be expected but the key thing is for the
rate to hold under the 106.30 area in my view. Swissy rallied as well making
new lows this morning then bouncing to new highs this afternoon; high prints
at 1.0915 were offered by technical traders but more whipsaw is expected.
Across the board the Greenback is under duress as technical factors favor
two-way trade but fundamentals favor lower prices; today's existing home
sales again showed a decline but as expected traders are remaining focused
on the bailout plan. Should congress fail to reach at least a reasonable
agreement the next 24 hours I think the markets will vote “no confidence” in
any plan by early next week. Despite the recent rally in the majors a
pullback is to be expected and with the uncertainty it would be reasonable
to expect large volatility near-term. If holding USD shorts it is wise to
either lighten up or go flat completely. Look to exploit a USD rally by
selling into the move should the USD have a retracement.

GBP/USD Daily

Resistance 3: 1.8700

Resistance 2: 1.8680

Resistance 1: 1.8620/30

Latest New York: 1.8512

Support 1: 1.8480

Support 2: 1.8420/30

Support 3: 1.8380

Comments

Rate two-way overnight, remains near unchanged to open New York; two-way
action continues. Some selling pressure seen but rate is likely to press for
highs on more bad news. Resistance is cleared the other side of the 1.8500
handle so expect a pullback to be bought hard. Aggressive traders can buy
the next dip but also look to lighten longs into the 1.8700 area if it
comes. Equities pullback vote of “no confidence” so far on the bailout.
Possible sovereign interest on the rally as semi-officials seen on dips in
both EURO and GBP recently. Some stops triggered along with active buying.
In my view, the GBP has weathered the storm fairly well and it suggests no
serious down move near-term. Traders note stops mixed with offers above the
market also. Major support has held for two weeks now, any weakness likely
to be bought hard. Profit-taking bids continue as well. Close above the
1.8500 area for the week likely argues for another leg higher to end the
month.

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

8:40am GBP MPC Member Barker Speaks

EURO/USD Daily

Resistance 3: 1.4800/10

Resistance 2: 1.4780

Resistance 1: 1.4710/20

Latest New York: 1.4627

Support 1: 1.4620/30

Support 2: 1.4580

Support 3: 1.4550

Comments

Late pullback on technical factors; some spillover from GBP. Rate two-way
and dips are being bought, follows GBP higher but lots of stops and active
buying seen. Light pressure intraday easily absorbed despite fear of
pullback. Weekly high below major resistance and rate is inside range so far
today suggests a point of indecision. Likely support will hold at the 1.4330
area. Some upside drawn from Cable no doubt. Expect more two-way action with
upside bias; traders note the rate is firm on dips so far despite the
uncertainty in the market. Volumes better during European trade than in Asia
overnight. Traders report offers in size being absorbed. Traders suggesting
that the rate is trading technically but likely this rally forced techies to
the sidelines. Close over the 1.4700 area to end this week will make a lot
of shorts nervous next week possibly extending a short-covering rally.
Expect a solid higher close for the week. If long, look to add to positions
on any weakness. Likely a dip back to the 1.4300 handle will offer a solid
buy opportunity.

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

2:00am EUR GfK German Consumer Climate

4:00am EUR Italian Trade Balance

4:00am EUR M3 Money Supply y/y

4:00am EUR Private Loans y/y

Analysis by: 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.