Great Graphic: Euro and Sterling Testing Key Levels

These Great Graphics are from my Bloomberg.  The one on the left is the daily bar chart of the euro.  It shows that the strong gains on August 21 have carried the single currency to its highest level since July 5 and is testing a trend line off the June 20 and June 29 highs.  The single currency finished the North American session just off its intra-session highs.  Technically, a break of that trend line could see follow though gains toward $1.2600-$1.2700.  

The euro has surpassed the $1.2440 area suggested here, but our argument about the euro was based on both time and price.  We recognized the scope for additional market positioning ahead of what promises to be an eventful September.   Our big picture view has not been changed by the recent price action.

Contrary to the headlines, we do not expect the debate over the official bond buying scheme, or what Draghi called "modalities" to be ultimate victory for the debtors as unlimited sovereign bond buying and "spread shield" would suggest.   

The chart on the right is the daily bar chart for sterling.  It is testing the upper end its 2 1/2-month trading range, which also corresponds to a 50% retracement of the slide from the year's high on April 30 near $1.63 to the June 1 low near $1.5270.  A move above $1.58 could quickly see $1.5900.  

The UK fundamentals are poor.  The economy appears to still be contracting.  Additional gilt purchases can be announced as early as next month.  The governing coalition is showing signs of strain.  

The European banter is likely to continue in the coming days.   The shuffle diplomacy between Greece and its creditors (Germany, France and the Eurogroup) is unlikely to resolve anything as the next Troika review is necessary  The FOMC minutes on August 22 could shed some light into Fed-think and ahead of Bernanke's Jacskon Hole speech, there is little reason or incentive for dollar bulls or euro bears to make a stand.  

Let the position squaring run its course.  We will be looking for technical signs that the position adjustment is tiring.   That will be the likely signal to begin fading the move, not the achievement of a price target in and of itself.   Stay tuned.