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The overnight Asian session started great, with investor optimism that the Bank of Japan would keep its monetary stimulus, even with the FOMC potentially starting to ease back on their own stimulus program. Trade data released recently has Japan posting a ¥1.29tn trade deficit for the month of November, the widest deficit since January of this year as inflated energy costs due to a weaker yen buoyed the y/o/y increase in the value of imports. A weakening yen will help support Japan’s export focused economy, but it also increases the value of imported energy costs, and unless Japan can turn around its nuclear program, any further downward pressure on the yen is unlikely to materially impact the trade deficit unless global growth suddenly picks up. The Nikkei ended is session higher by 2.02%, while USDJPY makes an assault on the 103 handle midway through European trade.

The economic and political hurdles to the US Federal Reserve to taper their bond purchases are steadily being removed so that it is almost a dead certainty – but don’t expect it to necessarily spur a USD rally, at the very least not yet.

It appears Democrats and Republicans are closing in on a deal over the US funds, which looks likely to stay clear of a confidence damaging shut-down of the federal government early next year. On the economic front the surprisingly strong US jobs numbers the other day and positive revisions to GDP are powerful incentives to get started reining in the Fed’s $85 billion a month bond purchasing programme.

EUR/USD has just reached and surpassed its previous resistance target at 1.3700, establishing a new 5-week high. This advance comes after a whole month of bullish price action as the EUR rose steadily from its 1.3300 support level against the USD in early November, which was the low of the last major downside correction.

The EUR now has a clear upside potential towards the 1.3830 are, which was last reached in late October. Any further breakout above that level would confirm a bullish trend, with a further upside objective at the 1.4000 level. As the pair is currently showing substantially overbought indications, however, another pullback is potentially due. Key downside support on this potential pullback within the current bullish trend tentatively resides around the 1.3600 level.

US indices ended into negative territory on Wednesday pressured by shares in the Utilities, Real Estate and Food, Beverage & Tobacco sectors. According to the FOMC minutes, "members generally expected that the data would prove consistent with the Committee's outlook for ongoing improvement in labour market conditions and would thus warrant trimming the pace of purchases in coming months." The S&P 500 (1781.4) remains above its 20d moving average (1770.9 - positive slope) and its 50d moving average (1730.2 - positive slope).

After Yellen told the US Senate Banking Committee on Thursday how the American economy continues to operate well below forecasts, investors pushed taper expectations out in to next year and all world majour stock indices are generally trading at historic heights. Both the S&P 500 and the Dow Jones Average are generally sitting upon six consecutive weeks of gains, and also risk-sensitive currencies are up sharply such as the Japanese Yen and the Mexican Peso.

The upcoming ECB interest rate decision is a critical one. The main reason is the huge fall in inflation in the euro-zone. At an annual rate of 0. 7%, the ECB is not even close to its inflation target which is set at 2%. The euro already is taking a beating due to possible ECB monetary policy loosening (as well as other reasons showing slowdown in the EU economy). Will the ECB provide the fuel for further declines or will there be something unforeseen?

We anticipate EUR/USD weakness heading into the report and a continuation following. Read more why we think so below