Dollar is trying to build up momentum for stronger rally after ISM manufacturing showed less than expected improvements but there is no decisive break from recent range yet. On the other hand, The Japanese is instead building up momentum in early US session and is possibly set to retest recent high against major currencies. Euro was talked down earlier today by comments that EU finance ministers would discuss the currency's appreciation before G7 meeting this weekend. Stocks are soft with DOW dropping over 100 points in early trading and drags crude oil back below 71 level. Current development favors some more upside in dollar in yen but the moves might be limited ahead of tomorrows non-farm payroll report.

US ISM manufacturing index unexpectedly dropped in the month of September, from 52.9 to 52.6, arguing the mild expansion in manufacturing sector is already losing momentum. though, personal spending rose sharply by 1.3% in August, larger than expectation of 1.1% and was the highest since 2001. Incomes climbed 0.2 percent for a second month and inflation decelerated. Headline PCE deflator dropped less than expected by -0.5% yoy while core PCE rose 1.3% yoy. Pending home sales rose strongly by 6.4% mom in August while construction spending also rose 0.8% mom. Initial jobless claims unexpected rose back to 551k level.

EU's Economic and Monetary Affairs Commissioner Joaquin Almunia said euro strength would be discussed when officials meet in Istanbul at the weekend. ECB Trichet said disorderly movements in exchange rates have adverse implications for economies. Eurozone unemployment rate rose to 10 year high of 9.6% in August, inline with expectation. PMI manufacturing was revised up from 49 to 49.3 in September. Germany retail sales unexpectedly dropped -1.5% mom, -2.6% yoy in August. Swiss SVME PMI rose sharply to 54.3 in September. UK Manufacturing PMI was a disappointment and stayed below 50 at 49.5 in September.

Japanese Tankan large manufacturers index improved to -33 but missed expectations of -32. Non-manufacturing index improved to -24, slightly better than consensus of -25. However, capital spending was down from -9.4% to -10.8% showing that companies are worried on the economic recovery. Japanese retail sales dropped less than expected by -1.8% yoy in Aug.

IMF raised forecasts for global economic growth in 2010 from 2.5% to 3.1% as more than 2T stimulus packages and demand in Asia helped the world economy recovers. US is expected to grow 1.5% Eurozone is expected to grow 0.3% while UK is expected to expand by 0.9%. In a separate report from IMF, dollar's share of global currency reserves dropped in Q2 to 62.8%, hitting the lowest level in a decade. The share dropped from 65% in Q1 and 62.9% a year ago. On the other hand, Euro's share rose to a record of 27.5%, up from Q1's 25.9%.

EUR/JPY Mid-Day Outlook

Daily Pivots: (S1) 130.59; (P) 131.31; (R1) 132.00; More.

EUR/JPY's break of 130.63 minor support suggests that recovery from 129.80 has completed earlier at 132.01 already. Intraday bias is flipped back to the downside for 129.70 first. Break there will confirm that fall from from 135.47 has resumed and should target 100% projection of 138.70 to 131.00 from 135.47 at 127.77 next. On the upside, above 132.01 will bring another round of recovery but after all, upside is expected to be limited well below 135.47 resistance and bring fall resumption.

In the bigger picture, as discussed before, medium term rebound from 112.10 has likely completed at 139.21 already, with bearish divergence condition in daily MACD and RSI, after failing to sustain above 55 weeks EMA. Break of 127.08 key support will confirm this case and target a retest of 112.10 low next. Also that price actions from 113.63 are treated as consolidation to long term decline from 169.96 only. Break of 127.08 will also argue that such consolidation has completed and indicates that the long term down trend is resuming too. On the upside, while another high above 139.21 cannot be ruled out, upside is expected to be limited by 141.73 cluster resistance (50% retracement of 169.96 to 113.63 at 141.79) and finally bring reversal.