Global forex markets have been focusing on China overnight, with a raft of economic data having been released during the Asian trading session, the most significant of which has been the GDP ( Gross Domestic Product) which came in at 9.8%, rising 0.2% on the previous quarter in the last quarter of 2010. The market had been expecting this news, with European and UK equity markets selling off heavily yesterday, with the London FTSE 100 closing with a bearish engulfing candle on the daily chart, giving a strong signal that risk on appetite has wained, a view which has been confirmed this morning with the index currently trading below the 5,900 level at 5,878, at time of writing. Asian equity markets also sold off heavily on the news, as the GDP figure hints at an economy which is overheating, and therefore one that will require the Chinese to take action sooner rather than later, with a further round of monetary tightening in due course. As such this has caused markets to stumble with the prospect of a slow down in China as a result, which is now the world’s second largest economy, pushing Japan into third place,behind the world’s largest, the US.

Forex markets have reacted slightly differently to the news, and indeed it is interesting to note that the US dollar has continued to sell off once again, a worrying trend, since the negative correlation with risk on/risk off appetite appears to have broken down temporarily. From a technical perspective, the USD index now appears to be heading lower, down towards the 78.09 region, and should this be breached, then we may see the index re-test the lows of mid October at 76.685 in due course. The 81.45 level is now a well developed area of potential resistance and with the index now having broken below all four moving averages once again, the outlook remains firmly bearish for the US dollar in the short to medium term. As such we can expect to see the majors benefit from further dollar weakness. It is also interesting to note on the same theme, that gold has also sold off again, another of the safe haven asset classes, so one wonders where investors are moving to this morning, and perhaps the Swiss Franc will benefit once more?

Elsewhere the euro dollar continues to remains bullish pushing back above the 1.3500 region once again, as it continues to probe this area and whilst we expect a pullback by late February with a possible move back to 1.25 – 1.27 in due course, in the short term we can expect to see further bullish momentum, and any break and hold above the 1.36 region could see a move towards the 1.3800 area in the medium term, before the markets take a reality check and we see bearish sentiment for the euro return. Indeed in early trading this morning, the euro has continued higher, despite growing unrest amongst EU finance ministers at the lack of progress in agreeing any timescales for the Euro Bond project, with Germany once again expressing it’s concerns. Longer term we can expect to see at least one member state leave the euro, and my guess is that Greece will be the first, followed by several others over the next two to three years.