The greenback managed to reverse all of its losses and even make new highs against the euro in an unexpected big move late last night…

What caused this move though wasn’t euro weakness as much, but risk aversion and DOW JONES plummeting to new lows. Markets are clearly contemplating the state of the American economy and with the yesterday’s data coming out extremely negative, with retail sales printing a bad number the same with PPI.

EUR/USD made a brief upward move above 1.49 but didn’t manage to sustain its gains or break even higher and gave it all back later in the day. GBP/USD managed to make it briefly above 1.97 but move was retraced too, making it hard for the pair to trade above 1.96.

For today, watch out 1.4860 for EUR/USD as a break of that level will put 1.49 back in track and more euro gains to come. Also on the downside 1.48 is very important and then 1.4770. A break of the later level will put 1.4740-very strong support level, as next target

Market sentiment at the moment is low, with the fear and uncertainty back in everyone’s minds. With carry trades clearly in the damps, and investors liquidating their short yen positions, the next target for USD/JPY would easily be 105 and GBP/JPY 206. As for the beloved EUR/JPY, the story gets even more intriguing. After the pair broke the very important support level of 158.80 it made an impressive dive hitting stops and finally printing a multi month low at 157 which stands at the time of writing. The main reason for euros weakness can be found in EYR/JPY alone and the more the pair falls, the more chances EUR/USD has to plummet too. Next target for the pair would be 156.60 which is a strong support level and a possible break would put more pressure in the pair.

Today’s data are very important what with US CPI and TICS being the first ones to be announced. Also later in the day we have NAHB Housing Index and also the Fed Beige Book. All data will be monitored closely by the markets, especially the inflation data as FED rate decision will be announced in a few days.

We believe that the current market conditions does not reflect the real sentiment as dollar has not so many reasons to be strong, what with all data being bad and more are awaited to be even worse. The analysts predict that if the economic crisis continues, and if more banks print losses due to sub prime turmoil, recession might be unavoidable and therefore more liquidation might occur.

All carry related trades got hit these days and with Bernanke being so dovish regarding rates, we might see more losses to come. Don’t forget that BOJ has not commented recently regarding yen strength, something which if it happened 3 years ago we probably would have an intervention by now. The current silence means though that maybe the bank has changed its stance and doesn’t think that yens strength can harm the economy.

Les wait and see what the day brings and if today’s CPI prints a very low number then it won’t be a question of IF Bernanke cuts next time but by how much…