The euro and the pound rebounded from early in the Asian session today and continued through the European session, as investors were a bit more positive about the European economic outlook after German Prime Minister Merkel vowed that she will do everything in her power to boost the current economic deterioration. The risk appetite rose after 3 days of continuous selling and now it is crucial to see where this correction will take us! Stocks were trading positively also, with Asia and Europe up following better earnings reports from banks and big corporations.

The EUR/USD retraced heavily at 1.25, which is a good psychological level for now, with the pair jumping more than 200 points, breaking 1.27. The next level to watch is 1.2780 ahead of 1.28 and if that breaks, higher strength may be seen in the pair. However, the sentiment is still negative and euro bears are waiting to sell on every rally attempt. The economic data is being closely monitored by market participants, and the fact that jobless claims out of US showed another increase over 620.000, makes investors wary of any further upside commitment.

The economic calendar today has some important economic data out of the US, with jobless claims being worse than forecast; showing the employment sector is still suffering at the hands of the current crisis and therefore the next payroll number may also be dismal, signaling the recession is still deepening. Also, we had Philly Fed Manufacturing Index, which came out negative at -41.2, confirming the collapse of the manufacturing section. Traders took the data as confirmation that risk aversion always comes back after a positive day in the markets. The current environment is so fragile that upside moves cannot be sustained for long and therefore the best way to go is selling on rallies.

The Obama administration stimulus plan has not yet managed to create a positive atmosphere amongst market participants and the more the data disappoints, the less confidence traders have in its effectiveness. So far, the month of February has proved to be a dollar-orientated month and traders continue to favor the US currency, even if the conditions are gloomy for the near future. The day we see the dollar weakening will be the day that confidence comes back in the markets and investors are looking for alternative assets to invest. This day has not yet come and is likely not to for some time, so we may as well go with the flow – which currently says: buy the greenback against its major counterparts at every opportunity and sell only at good resistance/support levels and only for a short term trade. The bigger picture shows the dollar may remain strong and there is no reason why traders should go against the sentiment unless clear signs for reversal are spotted…