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The markets have been without any major catalysts this week after last week's data and central bank fest. Some dreadful UK industrial and manufacturing production data this morning (industrial production fell 2.5% between May and June) along with some negative German factory orders failed to deter the bigger picture, which remains risk positive.

Can this risk rally be sustained?

So what is driving the rally in risk and is it a sign of a true change in trend? There are a couple of opposing answers to this question: 1, the rally is on exceptionally low volume so you can't trust it for the long term. 2, Germany's backing of the ECB to buy up Spanish debt if and when it applies for official EFSF/ ESM aid is enough to change the tone of the sovereign debt crisis, which is risk positive. Both arguments are valid right now. We won't hear much from European government ministers or ECB members in August (it is full blown holiday season in Europe) so there is a chance that we could meander higher for the next few days. For short-term traders there may be some opportunity to trade a potential ride higher by looking at RSI's and other momentum indicators to see when things look overbought/ oversold and may encourage some profit taking.

EURUSD is running into some resistance just below 1.2450, which is the first hurdle towards 1.25. 1.2475 then 1.2540 - the base of the Ichimoku cloud chart and the end of the technical downtrend- are major levels of resistance. Interestingly, the daily RSI does not look oversold at this moment, suggesting there may be some further upside momentum to come in this cross.

Politics could still get in the way

The euro is doing well on a broad-based basis and seems to have put in another bottom around the end of July/ start of August. While it is still weak within its range, the optimist could say there is plenty of scope for a sustained recovery in the single currency. In the short-term momentum may be enough to push the markets higher, however in the long-term we need to get confirmation that Spain is under control. This requires political effort, so it could still be a bumpy ride and investors may choose to take profit at major levels like 1.2540 in EURUSD.

Not a good day to be a safe haven

The yen is declining quite sharply on a broad-based basis as we lead up to the BOJ meeting, which begins overnight and concludes on Thursday 9th August. The market doesn't expect any action at this stage, although there is the potential for more stimulus after the very weak reading of CPI for June and July. The yen is falling particularly sharply against the USD and the EUR. EURJPY is testing resistance at 97.50 - the Kijun line on the cloud. Above here opens the way to test the cloud base at 99.30, if momentum in the single currency can be maintained. USDJPY is testing the top of its recent range at 78.50, above here opens the way to 79.05 - the 200-day sma and a key resistance level. Until we get above here the markets may remain jittery. The yen is the safe haven of choice these days, so we need to get through some major resistance levels until we can safely say that risk is back on.

Overall, the markets have been calmed once again by the promise of central bank action rather than by the real thing. This is significant as we have been disappointed before. But as Olympic spirit grips the world (particularly the UK - we are third in the medals table with only a fraction of the number of people they have in China or the US!!) the bulls are choosing to believe that the good news can be sustained, which is weighing on the safe havens and boosting the euro, commodity currencies, stocks and commodities.

Data watch:

It's mostly second tier data out for the rest of the day, which is unlikely to move markets too much.

Source: and Econoday

One to Watch: EURUSD

This pair has staged a strong recovery in the last three trading sessions. The daily RSI doesn't look overstretched, which suggests there may be room for more upside in the medium term. Above 1.2450 there is the potential for a re-test of 1.2540 - the base of the daily Ichimoku cloud chart as you see below. This is a major resistance level as it is the end of a technical downtrend and suggests we could be moving to a new paradigm for this pair.

For the shorter-term trader, 1.2540 could be fairly sticky for EURUSD, and may attract some profit taking as we approach this key level.



Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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