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This morning's price action is all about the euro. It bounced back above 1.25, and reached a high of 1.2560 this morning after the Eurozone reported better than expected money supply data for July and Spain sold more debt than it had intended to at an auction this morning. Usually money supply data is not particularly market-moving; however the sharp rise in the money supply suggests that lending conditions did improve in the currency bloc in the three months to July. Lending to households and businesses also rose by 0.1% in July. Although this is fairly weak growth it is better than the contraction we saw in June and May and suggests a slight improvement in position of the Eurozone's banks' balance sheets.

Can the ECB deliver the goods?

This combined with expectations that the ECB will step in to calm bond markets in the event of another flare up of sovereign concerns seems to be enough to extend the recent risk rally into the last week of August. As we get to the end of the summer it is interesting to note that Draghi's comments in London in late July that the ECB would do all in its power to keep the Eurozone together has been enough to cause EURUSD to rally more than 4%, the pan-European Eurostoxx index to rally 15%; even European banks and financial institutions have risen nearly 20% in the past month.

Does this make much sense? From a fundamental perspective no - the hurdles are large before the ECB will step in and intervene. We are expecting to hear more from President Draghi at the ECB's next policy meeting regarding the type of intervention we could expect from the ECB. Expectations are high for the Bank to introduce some form of sovereign bond-buying programme. However, the ECB has already said it won't do this without Spain first signing up for a second sovereign bailout with strict conditions and so far Madrid seems resistant to this idea. The second hurdle is Germany; it is unlikely that any bond-buying programme would start before Berlin's Constitutional Court has ruled on the legality of the long-term bailout programme - the ESM. A decision on that won't be taken until the middle of September. So are the markets setting themselves up for a fall? Perhaps, but that doesn't mean that the rally is over yet.

EURUSD stays above the cloud

Above 1.2475 in EURUSD - the top of the daily Ichimoku cloud - is a key level. Above here we are in a technical uptrend for this pair, thus its ability to stay above this level is of utmost importance for euro bulls. Positive bond auction results from Spain and good M3 data is enough to propel this pair forward today, but we have seen some profit-taking the closer we get to 1.26, as investors may not be convinced that this uptrend will extend another leg higher. Above 1.2560 then 1.2610 are also key levels that this pair needs to clear before some investors feel comfortable to put on EURUSD longs for the long-term and target 1.30.

All eyes on Bernanke

The dollar index seems to have found a bit of a base as we move towards lunchtime in London at 81.40, which may cap gains in EURUSD for the short-term. This index has fallen below 81.70 key support (its 100-day sma), which is now major resistance. We expect this level to be tested and potentially breached in the event that Bernanke's Jackson Hole speech on Friday at 1500BST/ 1000 ET is less dovish than expected. After a dovish set of FOMC minutes released last week from the Fed's early August meeting it's unlikely that Bernanke will announce fresh measures to boost the economy. He is likely to say that the Fed will remain ready and waiting to do more, but right now the economy is not weak enough to justify immediate action. Read our fundamental update later this week for more on this topic. Our ones to watch as we lead up to the Bernanke speech include gold and oil as both have proven themselves to be particularly sensitive to QE expectations in the past.

Looking ahead today, watch out for US house price data and consumer confidence. The market is likely to be extremely sensitive to US economic data this week, so any positive surprises could see a surge higher in the dollar, thus euro bulls should watch out. Also of note, Draghi is not going to the Fed conference in Jackson Hole this week due a "heavy workload". Maybe he's planning his next policy meeting or maybe the ECB is on an austerity drive? Either way the markets don't seem to mind.

Ones to Watch: EURGBP

This pair has had a nice push higher today as the pound has had continued to decline. GBPUSD has backed away from last week's 1.59 high and is testing support at 1.5750 - the 100-day sma. The overall pound weakness has benefitted EURGBP. Above 0.7900 - the 50-day sma - opens the way for a re-test of 0.8000 - the 100-day sma and also a key psychological level for this pair. 0.7960 - a double top from early August is a key interim resistance level. From a technical perspective this pair is starting to look overbought and we would look to sell on any move towards 0.7970 then to 0.8000. We think this rally remains fragile due to 1, the ferocity of the recent move higher and 2, the risks to the euro falling on a broad-based basis in the coming weeks due to fundamental factors. This pair is likely to be weighed down by profit-taking near big levels like 0.8000 and a short-term sell position could be worthwhile.

EURGBP daily chart


Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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