The Final Push Before Christmas, Eyes On FOMC Twist Replacement

Another quiet day in the markets and another slow grind higher.

Day started with the ZEW German Economic Sentiment, which as we highlighted set the real tone for the day. ZEW came in better than expected thus helping the general risk on trade.

That said the grind was gradual and very slow coming highlighting that the majority of the big players have already shut up shop for the holiday season.

However before we completely close the door we have three final events to focus on:

1) FOMC decision tomorrow - key here is looking for the replacement to operation twist which comes to an end at the end of this year. Unless the Fed wants to rapidly unwind its balance sheet it will need to replace it with something and therefore the market will be looking for details on this tomorrow, watch for the size of the programme. Market expects Operation Twist to be converted into Open Market Operations, therefore watch for how the Open Market Ops Money is spent, less on treasuries should drive the dollar higher with yields.

Other thing to watch for is the ever joyful Bernanke and the Bernanke put, been quite a successful trade idea this year, but the idea of shorting the dollar whilst Bernanke is speaking has statistically proven quite profitable, obviously his pure charisma; joking aside, watch for statements surrounding the fiscal cliff and the rapidly increasing deadline; remember apparently it is impossible for congress to make a decision over the holiday period, be damned if they are willing to give up their holiday to resolve some of the countries issues; therefore a deal is required extremely soon if we are to see one at all.

So onto the other key events this week.

We also have the EU leaders summit Thursday and Friday and the Japanese elections, however, given the quiet trading week, I will save these for tomorrow and Thursday, otherwise I will have very little to write.

EUR/USD
The euro continued a grind higher thanks to the ZEW, that said it was very gradual and although the euro has support it is based on very light volumes. With the FOMC up tomorrow we expect some dollar weakness but that could quickly spread into risk off and dollar strength on higher volume safe heaven flows. It is very hard to judge markets like this with very light volumes and therefore it is key to wait for really good entry signals.
Our strategy remains the same however, break of the support level would put us short.

GBP/USD
Not to be out done by the euro, the pound also ground higher. We are now approaching key resistance levels, if the pound can break these we might see a push higher, however, we like the chop to continue in December and therefore would prefer to look for strong rejections of upper resistance for a move lower.

AUD/USD
As we continue to mention, don't fight this pair, it seems to be well supported...still.

USD/JPY
I still like the dollar-yen for a retracement back to a support level before another push higher, however it seems determined to chop sideways, therefore our strategy is now altering towards breakout plays of the tight range that ha formed.

EUR/AUD
Interesting small set-up that has little risk for a possible quick trade. Rejection fo the 50-day moving average and with the aussie holding up so well this could be an interesting little trade idea.

EUR/CAD
The euro held strength and ground higher against the Canadian dollar as well today. We still like this for a further breakout play.