Tuesday 13/12/2011 8.00 PM GMT 9.00 PM CET

Up to 26 European Union countries will finalise a pact to enforce budget discipline more strictly in the euro zone by March, a top official said on Tuesday but the market doesn't care it's focused on now and its a fact the EU are not tackling the current crisis – they have their heads buried in the sand and this means more downside for the Euro...

Euro zone still remains in a complete mess and we have to see a country tipped over the edge, to wake policy makers up to the fact that - they need to get the ECB involved which is the only way out of the crisis in the short term. Over in the US, FOMC saw rates on hold as expected. Before we look at the news, let's look at our view of the major currency pairs.

Position Summary

After banking out great profits last week in our long dollar positions, were re opening them this week and below are the levels to watch for entry...

AUD/USD: We have been trading short since 1.080 and we have made some great profits and went flat on the dip to 1.020 and were looking to get back in on a rally to resistance at 1.020 which fails on falling momentum or a break of 1.000 which if it occurs will cement the down trend. Key resistance is now 1.040.We are sticking with our view that the Aussie dollar will trade down to the 80.00 level in 2012 and see it as a trend with fantastic long term downside potential.

GBP/USD: We have been trading the short side of the Pound since 1.61. After taking profit last week just above 1.56, we sold the break of this level and were looking for more downside. Look to sell any rally back to 1.56

CAD/USD: We have been sellers of the CAD since its pop up to 1.010 and its had a nice decline and we banked profits into 98.00 last week and were looking to get back in. Key resistance is 99.00 and we will sell any rally but it looks like we will get a break of 97.00 today and if we do we will take it, as it will cement the down trend and see the bears take control.

EUR/USD:We were short from the pop up to 1.42 and we have been swing trading all the way down and made some really nice profits and we expect more. Last week we banked out on the dip to 1.33 and went short when this support gave way and were now very near to our target of 1.30 which we set when the Euro was trading up at 1.42. We however thing if we break 1.30 unless something is done to get to grips with the crisis 1.20 will be seen quickly.

USD/JYP: For us the dollar is bullish and prices have moved up today and a move above 78.00 will see the up trend accelerate. 77.50 is now good solid support in our view buy dips or a breakout.

Euro Zone – ECB Stance Pressures Markets

While we had an agreement last week between EU members for closer fiscal integration and tighter budget controls – this obviously does not solve the problem right now.

The only steps taken were to add 200 billion euros to their current bailout fund and tan agreement to move up the creation of the ESM and said that by March the EU will reassess plans to but a limit on the overall lending of the ESM and the temporary fund at 500 billion euros.

Anyone can see the above is not enough – with Italys debts which need to be rolled over between now and mid next year being 1.5 trillion alone and Italy is not the only country in trouble we also have Spain and of course the 3 nations who have been bailed out already.

Today Bloomberg reported that:

German Chancellor Angela Merkel told German coalition lawmakers that the 500 billion euro ($654 billion) cap on Europe’s planned permanent bailout fund will stay in place, two officials with knowledge of the discussion said” (Bloomberg)

Merkel may think that the agreement reached last week, will save the Euro and mean Germany will be spared putting up cash to support the zone but she's wrong. As we have said for weeks – the ECB and common bond are needed and until this happens, the crisis will continue and if it gets out of hand and Italy say went down the global financial system would be plunged into crisis and we would face a global recession.

FOMC – Fed Holds Rates at Current levels

The Federal Reserve left monetary policy on hold but said financial market turbulence posed threats to economic growth and said:

"Strains in global financial markets continue to pose significant downside risks to the economic outlook," the central bank said

For a second time running, Chicago Fed President Charles Evans dissented against the majority decision, by being in favour of additional easing now. Vice Chair Janet Yellen, has also suggested the Fed would be inclined to take additional steps if growth fails to pick up.

So could we get a QE3? Umm there are some members of the Fed who want to do it but we doubt if we will get another round in the near future as we are seeing some life coming back to the economy albiet slowly. Also QE will do nothing to help the current situation and QE1 and 2 didn't work. Its in our view a ridiculous thing to do and dont expect the Fed to take this route with economy in its present state.

The US economy will take time to recover and job creation schemes are the key not printing more money. The economy is improving but its a slow process but at least its moving in the right direction. An index of consumer sentiment rose to its highest in six months in early December and the trade deficit narrowed in October so long way to go but QE3 is not an option get some job creation schemes on the go – that's what the US really needs.

Global Economy Sliding into Recession

Euro zone remains in a mess the UK, Japanese and American economies all remain sluggish and the nations of the East and the powerhouse Brazilian economy which have provided most of the economic growth and optimism about global growth are now all hitting the buffers and we see no reason for the global economy getting better, before it gets a lot worse.

With the bearish backdrop to the global economy, we see the dollar as bullish and after taking profits last week, were back long the dollar and expect more profits to come.

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