Early this week the EUR/USD was again trading close to the 1.2300 region. There seems to be a consensus amongst analysts that the bullishness seen in the recent trades for the EUR/USD pair is purely a corrective move; analysts seem to also agree that the downside should resume.

A more detailed look at four hourly charts for the EUR/USD shows that the 1.2150 region seems to be a significant level, which fits within the channels formed since 11th April, but it also features as a horizontal support/resistance since mid-May. The 1.2150 level has provided support when trading above the price and resistance when trading below it.

On a weekly time frame this temporary upside is seen to be limited around 1.2300 before resuming the downtrend again to take us somewhere around June 7 lows (1.1876), or maybe a bit above that level around 1.1900.

After the June 7 lows, the euro started to consolidate above the 1.1900 level, until it found significant boost by the ECB's conference (that followed the communication of their interest rate decision) - during the conference European Central Bank President Jean Claude Trichet managed to boost market confidence. Market disappointment for last Friday's release of US Retail retail Sales sales figures did not last too long, as hopes for global growth were reignited a few hours later, when another data release showed an improvement in US consumer sentiment.

When euro short positions are significant in volumes at some point, it inevitably leads to episodes of short covering, meaning some positions would have to be unwound, and this would push price upwards.

Nonetheless, EUR/USD still remains bearish given the euro will suffer from European debt problems, concerns over European banks; and limitations posed by a monetary union not being a political union.

On the other hand, the US dollar will benefit from expectations that the Federal Reserve will be raising rates ahead of eurozone.

This bearishness might approach a limit or reach a consolidation point as eurozone exports continue to benefit from a weakened common currency and also because the debt concerns start to taint other areas such as Japan and even the United States and the United Kingdom. As investors start to realise that even these regions have their own debt issues, the euro would comparatively seem less of a black sheep - and this would at some point to cap support for the US dollar support which comes at the euro's expense.

Of course risks still remain, as economist Nouriel Roubini suggests, the eurozone's rush to enact austerity measures could have endangered growth because it has taken away stimulus from the economy - and if there should be a double-dip there will not be anymore "policy bullets" to kick start the stagnant economy. Mr Roubini's views may be somewhat extreme but they still highlight potential risks.

Meanwhile in the United States, Stephen Roach, Chairman chairman at Morgan Stanley, commented that an anti-Cchina trade sanctions in the United States would be a "huge mistake". Mr Roach points to the possibility of a bad economic outcome.

China's rising inflation rate paired with a slowing industrial output has created a dilemma for the Chinese government, and it has also sent mixed signals for the prospects of global economic growth.

Higher food and housing prices were mainly to blame for this acceleration in inflation.

Even in India inflation has risen to two year highs, raising the possibility of interest rate rises. It must be noted that India has also registered its fastest manufacturing growth for these last fifteen 15 years.

Japanese manufacturers seem to have grown more optimistic in regard to the business environment.

This was highlighted from signals that companies are surviving the rising Yen, and eurozone debt troubles. More optimism comes from the fact that corporate spending is on the rise as well. The business survey index was released late last week and it registered a significant improvement for the April to June quarter.

In the United Kingdom the Office for Budget Responsibility, a new independent fiscal watchdog, has downgraded the previous Labour government's growth forecast. The figure was revised down to 2.6 per cent% from the previous 3%three per cent to 3.5 per cent% estimate. This reduction could translate in further cuts to public spending as a lower growth also means lower tax revenues. The new coalition Government government will have to try to strike the right balance, because too aggressive spending cuts could send UK economy closer to a double dip recession.

Upcoming FX Key events

Today: US CPI, UK Retail Sales & ECB Monthly report.

Tomorrow: German PPI.

Technical Key points

EUR/USD is bearish, target 1.1650, key reversal point 1.2450.
USD/JPY is bullish, target 98, key reversal point 85.
GBP/USD is bearish, target 1.4000, key reversal point 1.5000.
USD/CHF is bullish, target 1.2000, key reversal point 1.1000.
AUD/USD is bearish, target 0.7800, key reversal point 0.9000.
NZD/USD is bearish, target 0.6200, key reversal point 0.7150.

Mr Bovay is senior trader at RTFX Ltd.

This article has been prepared by Pascal Bovay, Senior Trader at RTFX Ltd.

Disclaimer RTFX Ltd ("RTFX") is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for informationinformation purposes only.

This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.

They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employees.

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