EUR/USD - According to our proprietary model, the euro single currency is set for a considerable breakout as implied differentials dropped off in the week.  Short term volatilities declined considerably while longer term peers remained relatively unchanged.  Breaking below the lower band, the suggestion is mildly similar to the previous break below that occurred during the week of August 20th, leading to an approximately 300 pip rise in the underlying.  Coupled with the widening bands, market participants may be interested in the shifting environment and the potential for a similar situation.  However, at this point, the 38.2 percent fib at 1.1647 from the July '01-December '04 move will be pivotal in establishing the direction.

GBP/USD - In similar fashion, sterling short term implieds declined considerably in the week before returning back above the lower band.  Suggestive of breakout potential, the dip is reminiscent of the break below during the week of August 16th when the underlying spot fell below the 1.8000 level.  With the current valuation testing the longer term 38.2 percent fib level from the June '01-December '04 move, a break below may see the same results as before.  On a side note, longer term peers remained unchanged thus widening the spread.

USD/JPY - Remaining unchanged for the past three weeks, yen volatilities continue to hover below the lower band suggesting imminent breakout potential in the underlying spot, setting aside the slight mid week jump.  What is notable here is that implied differentials have not seen this level since the beginning of the summer.  In May, the spread dipped below the lower band and effectively front ran the break of consolidation for a move higher following the previous bear wave.  Taking into consideration the technically overextended nature of the currency, this may not be far from the truth as the price approaches the 120.00 figure.   

Richard Lee is a Currency Strategist at FXCM.