[LFX]

There were some thought that the Euro may struggle once it got into the 1.50’s but the speed and intensity of the move lower has certainly surprised most FX traders. The Euro had started to look overbought technically a couple of weeks ago and its stretched valuation would have drawn selling interest from longer term players, but the main reason for this pullback:

Firstly the Guha article suggesting that rates may no longer be on hold for “an extended period of time” put a solid dent in the notion that the plentiful liquidity that has been driving this pro-risk trade was going to be available for a long time to come; and secondly, the narrowing proximity of year-end would have been enough for most fund managers in two minds to lock in profits on what has by and large been an exceptional year.

The brutal rebuttal from the stock market to GDP on Thursday and the Manufacturing ISM today would seem to suggest that the risk trade has had its day, but don't give up on it just yet. With so many key policy decisions to be made this week and the most important data point of all yet to come, it is a little early to sound the death bell for the risk rally right now. Clearly year-end will increase risk aversion for most managers, but if the BoE increase QE by 25-50bln GBP, the ECB extend the LTRO and the Fed keep their language unchanged then another leg higher for EUR/USD is definitely possibly/likely. Also, for all the ECB’s concerns about a strong Euro, Euroland Industrial exports seem set for a sustained sharp move higher.

Still bullish view on the Euro going into year-end and whilst one certainly respect and adapt to the newsflow this week, the initial game plan would be to buy Eur/usd on dips towards the 55 day at 1.4630 which has not been fully breached since the start of the rally back in April. In terms of resistance 1.4848-58 will come up first (today and Thursday’s highs) and then the high on the move at 1.5063.