Archived IMT (2010.09.20)

QE2 UNLIKELY TOMORRROW? Although a second round of quantitative easing from the Fed is inevitable, tomorrow is a little bit too early. Not only are financial markets relatively stable, but also any decision to engage in QE2 will weigh on USD against all currencies, including JPY. Thus, it is unlikely for the Fed to want to trigger fresh selloff in USDJPY less than 1 week after Japan intervened to halt the selloff in USDJPY. Does this mean the Fed will wait for 2 months until the QE2? (Next FOMC is not until Nov 3rd). Not necessarily. We could well see outright purchases of treasuries in October, as markets fret ahead of the mid term elections. And so the question for tomorrow is: to what extent will the FOMC signal a step towards fresh QE?. As a result, the general prediction would be a knee-jerk rally in USD on the revelation that no new QE is announced, likely to be followed by a gradual decline. EUR traders will also watch Tuesdays auctions of 4 and 8-year Irish bonds , which will be influential in setting the tone for EURUSD. $1.3030 acts as the 23.6% retracement of the rally from the 1.2636-1.3152 rally, but the more important foundation stands at $1.2955. USD weakness remains the impulsive move and it will take substantially negative European news for EURUSD to show a close below $1.2920.