USD weaker ahead of rate announcement. Fed expected to cut by 25 bpt

U.S. Dollar Trading (USD) eased against a basket of majors, as traders pre-empted rate cuts from the Federal Reserve to materialize on Tuesday. Although Friday’s Non Farm Payrolls data confirmed the likelihood of only a 25 bpt cut (as opposed to 50 bpt), speculators extended short dollar positions in anticipation of the third consecutive cut from central bank, totaling 1.00% in 3 months. In data news the Pending Home sales rose by 0.6% for the month of October. In other markets, UBS confirmed a write down of 10 billion following exposure to the sub-prime mortgages, although its impact on financials were limited as the investment bank had confirmed injections from Singapore and the Middle East. In U.S. share markets the NASDAQ was up 12.79 points (+0.47%) whilst the Dow Jones was also up 101.45 points (+0.74%). Crude oil fell by US$0.33 a barrel to US$87.95 as forecasts of warm weather in the U.S. will crimp demand for oil. Undoubtedly the most anticipated data release this week will be the FOMC rate announcement, in which a cut of 25 basis points appears to have been fully priced in. As always, statements accompanying the announcement will be paid attention to, as markets continue to try and measure the extent of the loosening cycle.   

The Euro (EUR) gained against the dollar, as traders continue to anticipate a rate cut of 25 bpt from the Federal Reserve. Hawkish comments were made by ECB officials on Monday as Liikanen made reference to upside risks to inflation, raising prospects that the central banks next move would likely be to hike. Overall the EURUSD traded with a low of 1.4641 and a high of 1.4736 before closing the day at 1.4710 in the New York session. The German ZEW survey will be made public on Tuesday at 10:00 GMT with forecasts at -34 (Previous: -32.5)

The Japanese Yen (JPY) traded on the back of other majors, in a little activity session, holding in a tight range. The USDJPY traded with a low of 111.37 and a high of 111.89 before closing the day at 111.66 in the New York session.

The Sterling (GBP) was buoyed by strong readings in PPI which showed acceleration from 3.8% to 4.5% (y/y) for the month of November, higher than expectations of 4.2%, and its highest level since June 1991. The inflation data prompted speculators to price the possibility that the BoE will look to hold rates in the immediate future. GBPUSD traded with a low of 2.0307 and a high of 2.0488 before closing the day at 2.0462 in the New York session. UK Trade Balance will be released on Tuesday.   

The Australian Dollar (AUD) was supported on Monday trading on the back of a broadly weaker USD. The AUDUSD traded with a low of 0.8730 and a high of 0.8848, before closing near day highs of 0.8844 in the New York session. RBA Governor Stevens will be talking on Tuesday at 07:00 GMT, in which he will outline to revised communications policy by the Central Bank.  

Gold (XAU) was higher in response to a weaker USD. XAU gained by US$13.40 an ounce to US$813.60
 
TECHNICAL COMMENTARY

Euro – 1.4705
Initial support at 1.4641 (Dec 10 low) followed by 1.4600 (Dec 7 low). Initial resistance is now located at 1.4770 (Dec 12 high) followed by 1.4800 (61.8% retracement of the 1.4968 to 1.4527 decline).
 
Yen – 111.95
Initial support is located at 110.63 (Dec 6 low) followed by 109.48 (Nov 29 low). Initial resistance is now at 111.88 (Dec 10 high) followed by 112.88 (Nov 9 high)
 
Pound – 2.0445
Initial support at 2.0299 (Dec 10 low) followed by 2.0181 (Dec 6 low). Initial resistance is now at 2.0507 (50% retracement of the 2.0833 to 2.0181 decline) followed by 2.0525 (Former support Dec 3)
 
Australian Dollar – 0.8855
Initial support a 0.8728 (Dec 10 low) followed by 0.8661 (Dec 5 low). Initial resistance is now at 0.8835 (Dec 10 high) followed by 0.8921 (Nov 28 high)
 
Gold – 807.00
Initial support at 777.20 (Dec 3 low) followed by 773.0 (Nov 20 low). Initial resistance is now at 812.50 (Dec 10 high) followed by 815.70 (November 27 high)