Euro Tests 1.40 - Will It Hold?

- Australian Dollar: Continues to correct as commodity prices recede

- Euro: Support at 1.40 holds for now

- British Pound: Trade data shows general trend to have flat lined

- USD: FOMC minutes and economic optimism on tap

Dealing started to return to normal after Monday?s holiday-leaden session, but with little fresh economic data on the calendar tonight, prices remained range bound. The EURUSD dropped to 1.4014 in early Asian trade but the psychologically important 1.4000 support level held and the pair managed to bounce to 1.4050. The unit continues to attract late buyers who missed the initial rally to 1.4200 and now perceive the 1.4000 figure as a bargain.

As we noted yesterday, whether this is a wise trading position remains to be seen. The pair is woefully overbought and in serious need of a correction. With dollar bulls having brought the EURUSD to within a few pips of the 1.40 figure, the temptation to run stops later on in the US session may be too great. The US calendar contains several events that may prove dollar positive as the day unfolds. The IBD/TIPP Economic Optimism Index, due at 14:00 GMT, which provides the earliest preview of US consumer sentiment, may show a rebound in attitudes after Friday? s better than expected Non-Farm payroll data. More importantly, the release of the FOMC minutes later in the day, could show a decidedly more hawkish posture from the Fed than the market expects.

At present, most of the currency market participants continue to believe that the Fed will lower rates at least another 25bp before the year end. However, in their latest speeches, the US monetary authorities have uniformly refused to speculate on any need for further loosening. The Fed may be content with the current policy and may decide that the 50bp cut in September was enough to stabilize the US economy. Furthermore, despite the turmoil in capital markets and the slowdown in housing, inflation remains a problem as commodity prices continue to hover near all time highs. If today?s minutes reveal that inflation continues to be a key concern for the FOMC, traders may downgrade the possibility of any additional rate cuts for the rest of 2007 and dollar bulls could take another run at the 1.4000 level in the EURUSD.