Pound Drops Through 1.8500 As Stops Tripped, But Rebound in Oil Puts and End to Dollar's Rally

Overnight Wire

• Russian parliament recognizes Ossetia and Akhazia putting bid back in oil as Georgian conflict escalates
• Equities nervous offgeopolitical tensions, rumors that Lehman CEO to be pushed out
• Dollar rally loses steam as oil firms into North American open
• North American event risk: Existing Home sales eyed 4.9M against 4.86 last month on hopes that lower prices sparked demand

NZD/USD Kiwi PPI 0.6% lowest in 3 months

USD/JPY Shirikawa: economy pressured by oil and lower exports but unlikely to deteriorate significantly, 110 still caps upside

GBP/USD London closed for bank holiday, Cable sees stops tripped at 1.8500 all the way to 1.8400 in early Asia but no followthrough and unit bounces back to 1.8500

EUR/USD:Weber; current euro levels closer to fundamentals

Pound Drops Through 1.8500 As Stops Tripped, But Rebound in Oil Puts and End to Dollar's Rally

Pound shorts were able to trip stops at the 1.8500 level in early Asian trade today and the unit made a near vertical drop of 100 points in a matter of 20 minutes as speculators piled in for the kill. After the initial fireworks were overhowever, cable made a full recovery arc trading all the way back to 1.8500 by midday London session.

Going into the weekend we noted that the "With prices hovering near 1.8500 by end of trade Friday, the temptation to run the stops may be almost overwhelming. But once 1.8500 is cleared sterling may bounce simply to relieve its oversold condition. " One factor that helped cable to stabilize and recover wasthebounce back in oil after traders learned that the Russian parliament voted to recognize the Georgian breakaway region of South Ossetia and Akhazia.

The resolution in the Duma was non-binding and still requires the approval of Russian President Dimitry Medvedev, but it nevertheless escalates tensions as markets continue to worry about Russia ultimate intensions in Georgia and most specifically her designs on the Baku - Tibilisi pipeline which transports a significant amount of crude away from Russia's territorial control. With oil prices firming above $115 level the pro-dollar rally quickly ran out of steam asthe long oil/short dollar trade reasserted itself bymidday European trade.

With little economic data on the calendarsave for Existing Home Sales, macro factors are likely to dominate trade in the currency markets for the rest of the day. The whipsawprice action in oil has created similar resultsin the EURUSD over the past several days, nevertheless the pair appears to have settled intoa 1.4700 -1.4900 range and may well consolidate there for the rest of the week, presuminggeopolitical conflicts remain contained. Last week the EUR/USD carved out a significant intermediate term bottomand unless US economic data proves surprisingly positive this week,the unit is likely tohold its recent lows putting a halt to any further greenback gains for the time being.

The current overall market view has reached a consensus that US data has not improved to the point where the Fedcan begin raising rates, while the EZ data has not yet deteriorated to the level where ECB will be forced to lower theirs. Therefore the pair remains in a tense equilibrium as markets await furthernews to determine longer term direction.

FX Upcoming

Boris Schlossberg
http://www.gftforex.com

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