As we expected, the euro demonstrated resilience against the USD and almost record strength against the sterling. This past week’s headlines highlighted the weakness of the UK economy. The cable market is foreseeing a rapid cut in overnight rates. A month ago, it was the comments from Trichet, the important ECB head, that managed to bring EURUSD below the 1.5250 mark – a level not seen since early March when the crude oil price rises triggered a major USD selloff. Germany showed this past week negative GDP growth, weaker than expected confidence numbers, and a preliminary CPI which was -0.3% m-o-m.

We get to hear of Trichet again this week and the stakes for EURUSD are again high. The euro is a mere 1.2% above the 1.4500 support level that signals a continuing EURUSD trend dating back to late 2005. But hawkish talk from the ECB board member Stark and ECB VP Papademos point to an ECB oblivious to growth concerns and intent on seeing ample CPI moderation before rate cuts are considered.

Over the past week, Cable made weak attempts to challenge the bullish USD trend. The combination of weak data out of Germany, record low GFK UK consumer confidence, dovish talk from Bank of England voting members, and better than expected US economic data (GDP, housing, durable goods, confidence, and Chicago PMI) demoralized sterling bulls. There is considerable talk of a worsening of the UK economic outlook and Mr. Brown’s government may announce this month what looks like a fiscal aid package for 2H 08.

The near record high EURGBP points to a major break in monetary policy expectations. The current trends would suggest the market pricing in a rapid decrease in the BoE overnight rates, while the ECB keeping its rates at present levels.

In our previous report, the actual EURUSD was trading 1.6% above the FMV EURUSD – a strong euro bullish signal. For Sunday’s expected actual close of EURUSD 1.4670, we anticipate the euro to be trading 1.3% above the Sunday EURUSD FMV value –a euro bullish signal.

The EURUSD FMV forecast for close on Monday is 1.4479 – about 200 pips (1.3%) below Friday’s close. As long as the actual EURUSD is above the EURUSD FMV it makes more sense to hold or buy EURUSD from a multi-day outlook.

From a wider FMV perspective, the EURGBP FMV is flat with the actual EURGBP – a neutral signal - but it has been euro bullish since mid-Aug. Despite a falling EURJPY, the euro closed the week 0.8% overbought relative to the yen (overbought 2.7% last week) and is projecting a bullish euro signal. Conversely, the euro is now oversold by 0.6% to the swissie. The FMV values to watch for close on Monday are: EURGBP 0.8093, EURJPY 158.14, and EURCHF 1.6195.

Last week, the actual GBPUSD was trading 0.5% below the GBPUSD FMV line – a bearish sterling signal. For Sunday’s expected actual close of GBPUSD 1.8226, we anticipate cable to be trading 1.3% above the Sunday GBPUSD FMV value –a cable bullish signal.

The GBPUSD FMV for close on Monday is 1.7891, a level that is about 330 pips (1.9%) below Friday’s close. A Monday’s close above this FMV level is likely and would indicate a bullish cable signal - a daily close below this level would point to the opposite.

From a wider FMV perspective, the sterling is currently flat/neutral relative to the euro. Unless EURGBP keeps on rising above Monday’s EURGBP FMV of 0.8093, we see a potential cable bullish signal starting Monday-Tuesday. Despite its decline against the yen, GBPJPY shows a slightly bullish cable signal. The FMV Monday close values for the sterling crosses to watch are: EURGBP 0.8093, GBPJPY 195.39, and GBPCHF 2.0010.

Last week we indicated that EURUSD would most likely trade in a 1.4750-1.4950 range (1.4570-1.4810 actual).Our Low-High range forecast was off by about 1% for both the top and the bottom. We believe the odds for a EURUSD rebound that we anticipated for last week are good for this week. For this week, we anticipate a trading range of 1.4550-1.4900.

Euro bears should recognize the ECB determination to crush Labor’s appetite for wage hike demands above 2.0%, even if it comes at the expense of steep negative economic growth in the Euro zone. We think the ECB will give subtle support to this euro bullish view on Thursday. The FMV is also continuing to point to euro strength, for a second week. Conversely, we recognize that any dovish comments from Trichet will likely trigger a euro selloff that will be most felt in EURGBP and EURUSD. Should the 1.45 support be broken this week, look for a series of weekly drops looking for support around the 1.35 level.

Last week we indicated that GBPUSD would most likely trade in a 1.7950-1.8650 range (1.8170 -1.8585 actual). Our forecast for the top side was off 0.3%, while the downside target was off 1.2%. The cable fall was not as steep as we anticipated, something that believe to be a prelude for a retracement. For the coming week, we see a GBPUSD trading range of 1.7950-1.8650.

From looking at last week, one could infer that cable is looking to test GBPUSD 1.80 support. We do not rule that out, but will go out on a limb and suggest that a cable retracement is likely for this week. The FMVs for GBPUSD and for EURGBP point to sterling strength. After a 7.1% GBPUSD drop for the past month, we are likely overdue for a sterling retracement. The ongoing crude oil price rise due to Hurricane Gustav is cable supportive. Even though the USD rally remains intact, we are likely to see cable hold the fort as we get closer to the psychologically important GBPUSD 1.80 level.