Wednesday's FOMC statement has been pulled apart word by word following the unexpected removal of the phrase "additional firming," which saw bonds, equities, and the euro immediately higher. The market interpreted this as a policy shift from a tightening bias to either neutral, or possibly even accommodative, for the first time since the Fed ended the 2-year tightening cycle in August. A deep look behind the carefully crafted statements reveals a Fed that is not free from inflation concerns, but a Fed that looking for options should the sub prime mortgage market spiral out of control and into the general real estate market. The Euro posted fresh 2-year highs against the Dollar, while the Dow came within 300 points of new all-time highs in reaction, but the most interesting price development was in US bond yields. The 10-year yield was sold 7 bps down into 4.5% yield on the expectations of summer rate hike from the Fed. But wait a minute. Haven't we seen a market reaction at the 4.5% level in the past? If you go back in your economic calendar you will remember a November '06 ISM Manufacturing number that printed 49.5 from 51.2 in October, well below the 51.5 consensus. The sub-50 print is a strong indication of contraction in the manufacturing sector, the dollar was sold in reaction, and the market was quickly talking about March rate cuts. But interestingly, the US interest rate price action following the ISM release suggested otherwise. The 10-year rate sold down into trendline support, around 4.45%, and then quickly reversed higher catching those trying to out think the Fed on the wrong side of the bond trade. They scrambled to dump their long-bond positions all the way up to a 4.91% 10-year yield.

Now back to this week's markets. Those trying to over analyze Wednesday's Fed statement minus "additional firming" from the statement went long US fixed income right back into the 4.5% 10-year yield support level. Have we just seen history repeat itself? Considering today's weak bond (strong rate) close in the Chicago pits, I am inclined to think so. The 10-year rate closed at the high tick for the week after testing trendline, 50% retracement support, following Wednesday's fireworks. And further strong data out of the US, like today's better-than-expected Existing Home Sales, is just the recipe we need for those prematurely long bonds to realize they might be outthinking the Fed, again. We should be looking for higher interest rates next week.

So going under the assumption that the market will slowly realize the US economy is not free from inflation, only the Fed is only trying to protect itself from a housing meltdown, we need to anticipate as expected, or slightly better than expected, economic data. On par data will further discourage doves expectation of a summer rate cut driving yields, and the dollar, higher. This should also hurt the US equity markets, which brings the recent equity market / carry trade correlation back to the forefront. It was the Chinese equity markets down 9.0% that spilled across to the West driving the DJIA 450 points lower on Fed 27. With the onset of unexpected financial market volatility, those long the carry trade quickly began to jump ship driving EUR/JPY 9 big figure lowers in 5 days.

Since then, both EUR/JPY and the equity markets have retraced a significant percentage of the losses. In fact, they both have retraced 78.6% of the losses. Technically speaking, the .786 retracement has been the location of some of the most infamous market reversal levels ever. And considering both markets closed below .786 after 3 unsuccessful attempts in a row, the 10 year rate just held support, and the markets could be prematurely looking for rate cuts, we need to be on the lookout for a possible reversal in equities and the carry trades.

We are short EUR/JPY between 157.65-95 with 158.25 stops targeting 154.60 on partials. If limits are executed at 154.60, trail stops to breakeven, and hold for a return to the 151 lows.

Todd Gordon is a Technical Currency Strategist and Fund Trader with GAIN Capital Group.

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The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.