Moody's report warning of the potential risks associated with Eastern European banks has been primary driver for the latest price action. EUR/USD has broken down through key short-term support at 1.2705 today to confirm bearish descending triangle formation. USD/JPY 87-93 DNT option set to expire on Thursday. Relative sentiment extremes suggest risk sentiment has improved. Looking to sell EUR/GBP.

MORNING SLICES

FUNDYS The lightened holiday trade has come and gone and the markets are back at it in full force on Tuesday with risk aversion and uncertainty emerging early in Asia to prompt fresh broad based USD buying, triggering massive sell-stops below 1.2700 in EUR/USD. A Moody's report warning of the potential risks associated with Eastern European banks has been getting a lot of attention and has been sourced as a primary driver for the latest price action. In the report, Italy, France, Belgium, Sweden, Germany and Austria were cited with Austria seen as having the highest exposure. Eastern European emerging markets have been hit hard with EUR/CZK, EUR/PLN and EUR/HUF all trading to fresh multi-year and life-time highs. Also seen generating fresh USD bids was a WSJ article about the failure of the Trump Fund and a requirement to repatriate back into USDs. On the data front, the latest ZEW survey out of Germany was much better than expected coming in at -5.8 after analysts had been looking for a significantly lower -25.0 reading. Meanwhile in the UK, CPI data was not as soft, coming in at -0.7% after forecasts had called for a -1.0% print. UK RPI was also slightly better at -1.3% versus the -1.4% consensus. Finally, Swiss retail sales was much better at 3.6% after analysts had been looking for a 2.0% reading. Japanese FinMin Nakagawa has had his resignation accepted by PM Aso. ECB Notwotny on the wires earlier saying that he sees negative growth rates for most European countries this year. He also says that while the ECB still has room to maneuver, he does not recommend moving to ZIRP. Looking ahead, US Empire manufacturing (-24.0 expected) is due at 13:30GMT followed by TICS data at 14:00GMT and NAHB housing index (8 expected) at 18:00GMT. US consumer confidence data (-53 expected) comes out later in the day at 22:00GMT. On the Fed circuit, St. Louis Fed Bullard is scheduled to speak to a group of economists in New York at 18:00GMT.

TECHS EUR/USD has broken down through key short-term support at 1.2705 today to confirm bearish descending triangle formation and now expose an eventual retest on the critical trend-lows at 1.2330 (28Oct lows). Look for intraday rallies to now be well capped ahead of 1.2810, while next support comes in by 1.2550 (4Dec low). USD/JPY has broken higher today reaching 92.75 ahead of the latest retreat back to daily opening levels by 91.75. The latest pullback should be concerning for bulls, but the structure still remains constructive intraday while above 91.35 (Monday low). Back below 91.35 shifts focus back on downside. GBP/USD has posted a fresh weekly low at 1.4125 today but still remains well propped ahead of the early February higher platform at 1.4055 with the market rallying back towards daily opening levels. Look for clearer directional bias on a break above 1.4350 or back below 1.4125. USD/CHF momentum has picked back up with the market surging to fresh weekly highs before stalling by the recent trend highs at 1.1785 (10Feb high). Nevertheless, the overall structure remains quite bullish favoring an eventual upside break to challenge 1.2300 (21Nov high). Only back under 1.1500 delays.

FLOWS Good demand for USD/CAD from a Dutch bank and IMM names, while local banks and corporates have been on the offer. Spec accounts on the bid in USD/JPY while Asian central banks selling; 87-93 DNT option set to expire on Thursday. Central bank demand for Aussie off of its lows. Russian offers in EUR/USD. Buy-stops reported in Cable above 1.4320.

QUANT

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TRADE OF THE DAY - EUR/GBP: The market looks to be in the process of rounding out a lower top by 0.9075 (12Feb high) which will ultimately be confirmed on a break back below the recent trend lows at 0.8635 (10Feb low). Daily studies confirm bearish outlook and show room for deeper setbacks below 0.8635 over the coming days. Initially, a break below 0.8830 (Friday's low) will accelerate declines and open a direct retest of 0.8635. Strategy: SELL@ 0.8900 FOR A 0.8635 OBJECTIVE, STOP @0.8975. Recommendation to be Removed if Not Triggered on Tuesday.

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Fundamental Catalyst - We are starting to see a notable shift in correlations between the cross rate and risk aversion. Up until the past couple of weeks, any rise in risk aversion generally had translated into a higher cross rate with the broad based market flight to safety trade doing the most damage to the UK currency, on the back of a local economy which had been deteriorating at a much faster pace than the other major economies. However, over the past few weeks we have begun to see acceleration within the deterioration in the Eurozone economy to more than offset any concern for the UK economy. While data out of the Eurozone has begun to come in generally weaker than expected (today's stronger ZEW is the exception), data out from the UK, on the whole, has been improving. Additionally, more talk of Eastern European banks under intense pressure and struggling to stay afloat has also been attracting a lot of attention, resulting in broad based Euro selling.

In the FX market, the name of the game is relative value. While all economies are suffering from the global financial crisis, those economies that have begun to deal with their problems more quickly, serve to benefit greatly in the long run. While the BoE has been very active in addressing ongoing threats to the local economy by introducing an overly accommodative monetary policy (much like the Fed), the ECB has arguably been behind the ball in coming to terms with the current market environment. This has begun to reflect itself in the cross rate, and we contend, should continue to do so over the longer term with EUR/GBP seen back towards 0.8000 over the coming weeks.

DailyFX

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