Sunday 29/01/2012 8.30 PM GMT

The Euro had another push today towards 1.32 but it started to fall back and we think the rally is just about done and lower prices will unfold and this also applies to the other majors.

In terms of news ,the markets rallying on the Fed being doveish is bizarre of course there going to be dovish the economy is having a patchy recovery. We will discuss this more in a moment but the global outlook remains dire and in Euro zone – we have a Greek debt crisis, Portugal's yields at record highs, the zone is slipping into recession and interest rates are on the way down and we think the recent rally is short covering and its time to load up shorts.

Lets have a quick look at our positions and then round up the news.

Position Summary

AD: We were wrong about the Aussie thinking it would top out into 1.050 and we ran up to 1.070 and came off. However we remain firmly bearish and think we will see 1.070 hold and a close below 1.060 would set up a test of 1.040. We still remain heavily bearish and expect a massive downside brake which will take us all the way down to 80.00 in the coming months

BP: The British Pound rallied to 1.56 and we sold it and it rallied to 1.57 and its trading just above this level but at an overbought chart extreme – watch for a break back to 1.5550 early next week

CD: We are short and were up at par and overbought and expect a downside break next week to target 97.00.

EC: We are lightly trading the short side from 1.30 and have relatively wide stop back behind the gap at 1.32. Were up at the gap now and don't think the euro can hurdle it, were overbought and would expect a move back in the first instance to 1.30 and longer term, we see 1.20 or lower. This rally is simply short covering and a selling opportunity

JY: After banking a small swing trade profit last week, we have banked another small one yesterday on the move above 77.00 prices are collapsing back to this level and we would like to pick up the dollar into support on a momentum up turn for another swing trade to the long side.

The Fed – Boosts Risk Appetite But ...

The Fed saying they are keeping interest rates low, has given a bit of a boost to risk assets and they even didn't rule out QE3 but that will be held in reserve in case of a major crisis in Euro zone and is not on the table now. For now growth is recovering, so there is no need to do more asset buying in the near term unless of course, Euro zone blows up into a massive crisis. Rates are low in the US but rates are falling fast in Europe and QE in all but name is taking place...

Over in Euro Zone- Portugal to Need a Bailout 

The Euro has had a good rally which has taken it up to the 1.32 level which looks to be a long term sell. Quite simply, the Euro had just become to bearish and this is just a short covering rally and will fizzle out once weak speculators are taken out on stop.

Euro zone interbank lending rates headed south last week and have plenty of room to fall further given the huge liquidity being pumped into the baking system by the ECB. Benchmark three-month Euribor rates dropped to their lowest since March 2011 at 1.138% The rate has fallen by more than 30 basis points since the European Central Bank announced in December it was giving banks almost half a trillion euros and its offering more cheap cash in February which will probably amount to 300 trillion. This liquidity is forcing rates down and also will send the currency south because printing money – means a lower currency.

So we have interest rates on the move down and of course a whole host of problems in Euro zone and one glaring one is the funds in reserve for countries in trouble is to small.

Austrian chancellor Werner Faymann said in an interview last week he believed the 500-billion euro ESM may need to be raised and IMF head Christine Lagarde said the same and of course its to small but Germany is the country which needs to put up cash and it doesn't want to do it. The only way Germany will be persuaded is if there is a major crisis but that will come – its just a question of when.

The zone is in recession and at a time of contracting growth, we have countries embarking on austerity which will choke growth even more.

Greece will probably be saved but the markets are now eyeing Portugal. The absolute level of 10-year bond yields, have risen, three percentage points to 15 percent since S&P moved on Jan. 13 to downgrade them to junk. Portugal will need another bailout and while rates have fallen for Italy and Spain they still remain high and can easily rise again.

This will not require huge cash but after euro zone officials called the second bailout for Greece a unique case – we now have another one! Hardly inspires confidence....

The key problem in Euro zone is there is no policy everyone agrees on and when they all manage to come up with a plan, its not one which investors have any confidence in as it doesn't solve the short term problems the zone faces.

Where does this leave the Euro?

As a great long term sell. Short covering is nearly done and its a question of simply selling and holding. While the Euro will have short, sharp rallies ( like we are seeing now) there are simply correcting oversold levels and a selling opportunity. Look to key off the gap at 1.32 for shorts next week on falling momentum.

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