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A few thoughts to end the trading day:

The summer rally shows no signs of fading and made some big headway today after multiple asset classes made some important gains. Even more interesting is that this happened even though Atlanta Fed President Denis Lockhart, a rotating voter at the Federal Reserve and noted dove, stubbed out the chances of more QE from the FOMC when he said that policy makers face the risk of excessive easing. Lockhart passed the baton to stimulating the US's "disappointing" recovery (his words) to the government when he said that fiscal reforms can overcome some economic challenges. Do markets think that Lockhart is bluffing; do they still think that the "Draghi put" is in play and the ECB can resolve the sovereign debt crisis, thus prolonging this rally?

In the absence of economic data in the US session the markets seem to be jumping on a couple of things: 1, headlines that Germany may be willing to make concessions on Greece's bailout programme, which could keep the country in the currency bloc. 2, The prospect that the concessions may be announced as early as tomorrow after Ecofin head Jean Claude Juncker said that the Greek prime minister will hold a press conference tomorrow at 1600 GMT.

This seems like a flimsy way to base a rally, but although the fundamentals might leave a lot to be desired, the technical indicators were a green light for the bulls for the European session. Treasury yields jumped 6 basis points pushing the 10-year bond yield to 1.85%, close to its highest level since May. Interestingly though this hasn't had much impact on USDJPY as the greenback has been sold off in favour of riskier assets today. During periods of robust risk on and off USDJPY can tend to trade sideways and that is what we are seeing now. Thus, the fact that USDJPY isn't making traction is not necessarily a warning sign that this rally is on shaky ground. Much more worrying in my view is the fall in Apple (the most valuable company in the world after its stock hit a fresh record high yesterday) and the corresponding drop in the Nasdaq tech index in the US. Investors are probably looking to take profit after a strong run, but I will be watching the Nasdaq to see if it can carry on its recent run. I don't think this is the time to call the top in this rally - the daily momentum indicators don't yet suggest that the markets are overbought - instead they are suggesting that there could be a pullback in the near term as the momentum indicators on the 60 min charts are starting to look overbought including the EURUSD, copper, Dax, S&P 500 and one of the ultimate risk trades in the FX space EURJPY. The oil price has already turned over and is back below $115 per barrel, thus we could see other asset classes give back some recent gains in the coming days as oil has tended to be a lead indicator in recent months.

Going forward, it will be interesting to see if this rally can withstand another knock to QE prospects post tomorrow's FOMC minutes and the Jackson Hole speech at the end of the month. But we shall have to wait and see. Until then I would look at the AUDUSD, which is currently testing its 200-hour moving average, to see if it can hold this support level. If it bounces higher then it suggests the risk rally could have further to go, if it doesn't then there could be a deeper sell off and EURUSD could be at risk of moving back to 1.2440 then 1.2400.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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