The euro and pound have been on a tear against the U.S. dollar over the last few weeks as investors have begun to price in another round of quantitative easing measures from the Federal Reserve.  Last week, the FOMC Report confirmed investors' concern as the Fed made it pretty clear they are seriously considering a further round of quantitative easing measures possibly as soon as the November meeting.

Fundamentally, quantitative easing means there will be an enormous amount of additional U.S. dollars injected into the economy, which means the real supply of U.S. dollars in the global economy will increase dramatically; thus, the basic economic principle of supply and demand will drive the U.S. dollar down significantly, and this is exactly what has happened over the last few weeks as it becomes clearer that the Fed is looking to further stimulus measures.

However, the month of September has been surprisingly strong for U.S. equity markets.  Generally, September is a tough month for the stock market, but this month, the S&P and Dow have both outperformed historical averages for the month of September, and this is giving investors a bit of confidence that perhaps the Fed will not have to inject further stimulus in the month of November.

This dovish outlook from the Fed, however, is being combined with "okay" key economic data out of the U.S. over the last 2 weeks.  Retail sales were up, housing data was mixed with no huge downside surprises, and the manufacturing sector is also mixed with some data surprising strongly to the upside with some data a bit lower than expectations.  Overall, key economic data out of the U.S. has not been as bad as it was during the summer months, and this may serve to convince the Fed to hold off on further stimulus measures.  The Federal Reserve has been very clear that they are very willing to introduce further stimulus measures into the economy, but they will not do it until economic conditions clearly warrant the need.

Also, the sovereign crisis in the EuroZone is again in the headlines as Ireland struggles to recover.  GDP out of Ireland last week was far below expectations, and there are rumors in the market that the European Central Bank may have to use emergency funds to bail Ireland out, and this uncertainty has caused investors to pause over the last few days.  These two factors of a sideways U.S. economy and a possibly deteriorating picture in the EuroZone are keeping investors from pushing the Euro higher.

EUR/USD

 Note: Past performance is not indicative of future results.
The EUR/USD is currently at a very key price level.  First of all, it is at the 38% of the overall weekly move from the HI of 1.6030 from before the crisis to a LO of 1.1875.  Second of all it is sitting just below the 50% fib of the last overall move on the Daily Chart.  This area of fib confluence is offering heavy resistance to the EUR/USD, and as we stated in our commentary above, the fundamental picture is also leaning toward possible dollar strength in the near term.  We are expecting the euro to lose strength against the dollar in the near strength.  If this area at 1.3500 does hold in the near term, we could see a euro correction to 1.3410, 1.3295, and 1.3150.  Each of these areas of downside support areas should offer strong buying interest from euro bulls and should offer traders nice short-term moves of 20+ pips.

Pound

The GBP/USD is also at very key overhead resistance on the longer-term.  The pound is sitting just below the 79% retracement of the last major swing on the Daily Chart at 1.5849.  Not only has the pound failed at this level, but it is forming strong reversal characteristics.  The Monday Daily Candle is looking very bearish with a strong wick to the upside.  This is generally indicative of reversal behavior, and this should pull the pound down.
 Note: Past performance is not indicative of future results.
If sellers do take further control of the pound and hold the 1.5850 level, then price will most likely head to the 1.5725 area, which is the backside of the 62% Fib of the overall Daily move that price is moving inside of.  On the bullish side, though, the pound is still holding the HI's from Friday's upside breakout quite nicely.  The fact that the pound has held these HI's for 2 day now is evidence that the bulls are still present.  The longer that price can stay above 1.5800, the greater the chance that it will finally break to the upside.  The next spot of heavy resistance on the pound is not until 1.6000.

China Versus U.S.

There is a very real currency war being fought between China and the United States, and the outcome could have very strong impact on both economies.  The problem is no surprise.  The Chinese have been keeping their currency artificially devalued since the outbreak of the global recession in 2008.  A few months ago they agreed to allow the yuan to begin floating, but the lack of valuation has many experts, politicians, and economists upset that China is still manipulating its currency.  China is not one to be bullied on political and economic matters, so this is creating quite a heat of debate between the two countries.

U.S. legislators are trying to push a bill through Congress that will allow importers to put a heavy duty on Chinese goods which will hurt Chinese exports, and China is threatening to retaliate by punishing U.S. companies that operate in China.  The threats on both sides are very real, and both economies will most likely take hits in the end.  However, if the Chinese yuan does begin to appreciate strongly, the U.S. dollar may come under pressure.  The Chinese keep the yuan artificially pegged to the dollar by purchasing huge amounts of dollars.  If the yuan begins to float, then the Chinese will not have as much incentive to buy dollars, and the dollar could fall sharply.