FX Commentary – Euro top seen?

Euro may have seen a top
The dollar steadied around a cent away from the previous session's record low versus the euro on Wednesday, cheered by a new measure aimed at stabilising U.S. financial stocks and by a sharp retreat in oil prices.
Concerns about the U.S. financial sector intensified earlier in the week after the U.S. government was forced to come up with a rescue plan for mortgage lending giants Fannie Mae and Freddie Mac, just as one of the country's biggest mortgage banks collapsed.
In addition, Federal Reserve Chairman Ben Bernanke did the dollar no favours when he said on Tuesday restoring stability to the hard-hit financial sector was his top priority, suggesting any potential interest rate hikes to contain inflation will not be coming soon.
But while those concerns — which had sent the dollar to a record low versus the euro — remained, investors took some heart after U.S. Securities and Exchange Commission (SEC) issued an emergency rule on Tuesday to limit certain types of short selling in major financial firms.
However, a near term top for the euro may be in place as the euro could not recover above the mid-point of Tuesday, at $1.5952. In a separate report, BNP Paribas analysts said markets are undergoing a significant change with the bankruptcy of a Spanish real estate company leaving EUR5.4bln of debt behind, convincing investors to sell the EUR. Due to USD weakness EUR selling developed via the crosses, but the side-effect of the ‘cross selling’ is EURUSD coming off its highs too.
Model traders went long EURUSD on its break above 1.60, but the lack of follow through will force model traders out of their positions. Many black box models will not allow non performing positions to stay in place for more that a day or two, leaving the EUR vulnerable today, said BNPP.
A break in the European session above 1.5950-70 would suggest a rally on 1.6038 Tuesday high, and then open the way for a rally to 1.6160-1.6250. Similarly, USDCHF needs to break below 1.0015 and more importantly 0.9995 to open the way for a sharp decline to the previous lows of 0.9930, then 0.9870. Otherwise, a rebound in the dollar is possible.