The EUR/USD pair started off July with a very strong rebound for the euro, rising from around the region of 1.22 early Thursday morning to end above 1.25 at closing. It managed to maintain this level until early this week - 1.2480 seems to have held well and has acted as a very good horizontal support, 1.2480 also corresponds to the 50 per cent Fibonacci retracement (set between May 10 high and June 7 low) when seen on four hourly charts.

This significant shift might be attributed to weak US economic data released last Thursday, which reignited doubts on the US economic recovery.

In addition, last Thursday the euro gained support from a successful Spanish sale of €3.5 billion five-year bonds, a day after European banks had borrowed less money than was being expected from a Central Bank tender. ECB said 171 banks borrowed €131.9 billion over three months, which was below the expected €210 billion. Not everyone is so enthusiastic about the euro's improved support however. In an article published in London's The Telegraph, RBS and other institutions have come out saying that Europe's stress tests run the risk of further damaging confidence if they fail to cover the risk of large sovereign default losses. RBS economists criticised the tests as not rigorous enough - the test results should be published on July 23 - while they will most likely reveal a healthy situation, markets are asking if the stress tests are comprehensive enough.

Moreover, an RBS spokesman warned that markets' exposure to around €2 trillion in Spanish debt cannot be patched for too long by three-month loans from the European Central Bank. Spanish banks have been struggling to tap funds from international markets making them dependant on ECB, but now that Caja Madrid (a major savings bank in Spain) has secured an affiliation to an international clearing house for interbank borrowing it should be easier to channel foreign funds to Spain's banks.

In the US, economists are arguing on the likelihood of a double dip, quoting signs that inventories are rising and sales declining which would probably result in reduced future orders and thus diminishing future growth. Uncertainty is clouding the US economy as the cost of initiatives (for health care, energy, financial reform, regulations and taxes for example) dealt by the government is not known to the business community. Politically, the government's lack of action to immediately tackle the debt and deficits is also supplementing the market's uncertainty.

In the UK, reports issued Monday of a survey by the British Chamber Of Commerce revealed that the services sector experienced the strongest growth over the past three months in these last two years, even the manufacturing sector grew strongly. However, chief economist David Kern, while acknowledging the strength of the manufacturing sector, warned that despite this growth in the services sector, it is worrying that services are not strong in the British economy. Although he finds the tight fiscal policy adopted necessary, he highlighted that it increased the risks of a double dip recession - and thus makes it more necessary for the Bank of England to keep interest rates low.

If we further distance the possibility that the BoE raises interest rates, it will make the British pound relatively weaker when compared to other high yielding currencies and this will weigh on the British pound in the short to medium-term scenario.

Early this week in Australia, the RBA kept rates unchanged at 4.5 per cent. The Central Bank explained its caution given the situation in global markets but remained positive on the outlook of the Australian and Asian economies. The Australian dollar rallied on the RBA's optimism for Asia.

Meanwhile, major mining groups Rio Tinto and Xstrata have managed to strike a deal with the Australian government for a previously proposed 40 per cent mining tax.

This same tax spelled the end of the previous Australian prime minister's term. The new prime minister, Julia Gillard, has negotiated a reduced rate of 30 per cent for the tax - and in return the two mining groups have agreed to resume the projects that had been stopped in protest to the previously proposed 40 per cent tax. Data from Japan has revealed that China has boosted its buying of Japanese government bonds, buying a net of $6 billion in the first four months of this year. The increase corresponds with the start of the eurozone fiscal crisis and analysts see this as a short term move while eurozone fiscal problems keep weighing on the euro.

Upcoming FX key events

Today: Eurozone ECB interest rate decision and UK BoE interest rate decision and asset purchases target.

Tomorrow: German inflation, Canadian unemployment data and US housing stats.

FX Technical key points

EUR/USD is bearish, target 1.1850, key reversal point 1.3000.
USD/JPY is bullish, target 98, key reversal point 85.
GBP/USD is bearish, target 1.4000, key reversal point 1.5500.
USD/CHF is bullish, target 1.2000, key reversal point 1.0500.
AUD/USD is bearish, target 0.7800, key reversal point 0.9100.
NZD/USD is bearish, target 0.6200, key reversal point 0.7250.

Mr Muscat is senior trader at RTFX Ltd.

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 information 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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