EUR USD (1.2240) On Friday, the USD-index retreated smartly from the year-high achieved one day earlier. Indeed, in the space of just one hour it covered the entire ground from the day’s high to the day’s low – and this without any obvious catalyst. Versus the euro, a new two-year extreme was printed before the abrupt reversal. We suspect, therefore, that the move was a product of short-term, preweekend position adjustment rather than a change in market beliefs. Quite possibly, after having had little bearish follow-through in the euro as a result of the Italian debt downgrade, and next to no price reaction to the day’s US data release, some short-covering ensued. We see the broader picture for the euro as essentially unchanged. The long-term selling that has been in place for several months is likely to continue, meaning that even though speculative accounts are already short, the euro could continue to grind lower. On Friday, it flirted with 1.2155, the level we had identified as the initial downside risk. Any violation there now would certainly add to the bearish momentum and announce a near-term test of 1.2010. To the upside, the first good supply point remains at 1.2310 and we would consider a break there as an initial positive sign for the euro, as it would suggest the recovery off the low is more than just a pre-weekend anomaly. To confirm a stabilisation, however, we must first see 1.2440 (slightly lower) overtaken.
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Deutsche Bank