We saw the EUR/USD hit an 8-week high in today's trading as we tested the 1.35 area during European session. This is going to be an important test for this pair. Will traders and investors sell the rally at this point or can the EUR/USD extend its recent momentum even further, further retracing its strong decline during November when we had the Irish debt crisis and rescue.

From overnight, here are a couple of stories from Marketwatch that I think were most important to shaping risk sentiment:

1. Overnight Portugal sells 750 mln euros of 12-month bills - Portugal's debt agency on Wednesday sold 750 million euros ($1.01 billion) of 12-month bills at auction. The sale produced an average yield of 4.03%, with bids exceeding supply 3.1 times. An auction of 12-month bills in December produced an average yield of 5.28% and a bid-to-cover ratio of 2.5.

2. Greek CDS spreads choppy on restructuring reports - The German and Greek finance ministries on Wednesday denied a report in the German weekly newspaper Die Zeit that the German government was weighing a plan that would allow Greece to retire some debt early, using subsidies from the European Financial Stability Facility, Dow Jones Newswires reported. Spreads on Greek credit default swaps, or CDS, initially widened but then narrowed after the Die Zeit report was denied. The spread on five-year Greek CDS traded at 885 basis points, up from 883 on Tuesday, in recent action, according to data provider Markit. That means it would cost $885,000 annually to insure $10 million of Greek debt against default for five years. The spread hit 915 basis points in earlier activity, Markit said.

Implications for EUR/USD as we hit 8-Month Highs

Portugal paid a significantly lower yield for its 12-month bills, at 4.03% compared to 5.28% in December. That's a positive sign for the bond markets in the Euro-zone periphery. The mood has dramatically changed from a few weeks ago, when the Euro was being sold on sovereign debt fears.

The second story - Germany considering retiring Greek debt early - can have much wider implications. The first as you can see is the market for credit default swaps - in essence insurance that if Greek defaults a creditor still gets paid back their principal. Such a step shows how European leaders are considering expanding the role of the EFSF bailout fund and overall, being able to retire debt seems like a good step forward in trying to stem off the crisis, though it may not be in the best interests of creditors, especially if there are haircuts involved. In other words, will creditors get the full 100% back, or will there be some restructuring of the debt, so the figure is 90%, 80, or 70%. Whenever talk of this arises, creditors taking haircuts, it increases risk aversion.

As we look at our daily chart, we see that EUR/USD is trying to extend last week's rally.

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The EUR/USD has reached the 1.35 area, the top part of our recent range. While all of these positive developments (we list below) have helped the EUR/USD to erase its losses from 2 weeks ago, we are now pushing past our old resistance level. Do traders really have a reason to continue loading up on Euros? The 1.35 area is then an important level.

If we go down to lower timeframes, we see that the Euro heads into today's NY trading session with a head of steam.

Today's US data will remind investors about the sluggish US housing market, and there has been pretty general disappointment with the labor market figures. We should remember, that before the Ireland crisis and rescue, we were trading around the 1.40 level. If we extend this relief rally, and European leaders continue to try and get ahead of the market by expanding the use of the rescue fund, then the EUR/USD might have a chance to extend this move back up to those October and early November levels.

The Euro has had several positive developments going for it recently:

1. Germany softening its stance about expanding the role or size or lending capacity of the European Financial Stability Facility - the €440 billion rescue fund. Political leaders are trying to get ahead of the situation.

2. Support for buying the bonds from the EFSF has been backed by several important countries, including China, Japan and now this week Russia.

3. Last week, both Portugal and Spain (and even Italy) had government debt auctions that went smoothly enough for the market. Today's Portugal auction.

4. The ECB was seen buying up Portuguese and Irish debt at the start of this rally helping to stabilize yields. The central bank may have a partner now in the EFSF rescue fund as one of the options being considered by policy makers is to allow it buy sovereign debt of stressed countries.

5. Yesterday we have good data from Germany which shows us that the main engine of growth in the Euro-zone continues to power along. Investor confidence was a 6-year high.

In the US we have a mixed picture:

1. Consumer spending, confirmed by Friday's retail sales, shows that a key driver of US growth is powering the current up-tick in economic activity.

2. However it hasn't necessarily translated to stronger job growth which means the labor market continues to remain remain lackluster.

3. As we are going to be reminded today, the housing sector in the US remains at depressed levels.

4. I don't think the US would mind too much that US Dollar would be falling, as it would help make US exports more competitive.

Bias: EUR can extend rally if fundamentals can beat the technicals.

The fundamentals therefore do line up for further EUR/USD gains, but will it be able to move away from its sideways range? If we sustain a move above 1.35, the target would be first 1.3740 and then 1.3980, the 61.8% and 78.6% fibonacci levels when retracing the move from November.