Monday 30/01/2012 8.30 PM GMT

The Euro back off from gap resistance and 1.32 and traded lower as did the Pound, Aussie and Canadian Dollar and were looking for the dollar to base and move higher.

The Euro has had a good rally to correct oversold levels and were looking for the rally to falter here we may try one more time to hurdle the gap but expect a breakdown a move below 1.31 should set up a test of 1.29. 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 below this level but at an overbought chart extreme – watch for a break back to 1.5550.

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 and are heading for 76.00 and we are looking for an opportunity to buy as the dollar becomes oversold.

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...

Euro Zone – A Summit to Stabalize the Euro

European leaders agreed that a 500-billion-euro European Stability Mechanism will enter into force in July, a year earlier than planned – big deal, its to small anyway and will not really inspire investor confidence - it needs to be double in size to show real intent and there are plenty of debts around in Euro zone

Negotiations between Greece and private bondholders over restructuring 200 billion euros of debt has made progress but were not concluded in time for the summit but I think its safe to assume some deal will be reached. There ae however other problems brewing

Portugal – looks like it will become the next Greece in needing a second bailout to avoid bankruptcy - Banks raised the cost of insuring government bonds against default and insisted the money be paid in advance instead of over yearly periods. The yield spread on 10-year Portuguese bonds over safe haven German Bunds went over 15 percentage points for the first time time today and if Portugal does need another bailout its a blow for the EU after they said Greece's situation was unique!

The zone is sliding into recession and Spain's economy contracted in the last quarter of 2011 for the first time in two years and is in recession. Spain is aiming to cut its budget deficit from 8 percent of GDP in half to 4.4 percent by the end of 2012, but this target looks a bit on the optimistic side as growth contracts and is set to contract further. France halved its 2012 growth forecast to just 0.5% and of course Italy which is not in the news at the moment soon will be as the crisis of debt continues there.

So we have contracting growth, a fiscal crisis and interest rates set to fall further, helped by a huge liquidity boost from the ECB which is QE in all but name and printing money means a lower currency.

Having said all the above the Euro is hardly falling hard and over the last week has had a really good rally as it corrects its oversold condition but upside looks limited and we see the gap holding the advance and would not be surprised to see one more move to the up but this rally looks set to top out.

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