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Day five: our EUR/USD trade

EUR/USD took a dive last night, although found solid support at 1.3576 (the 23.6% retracement of the June to October rally) and appears to be basing above this level in Asia.

My proposed stop loss at 1.3750 remains in place, although the prospect of it being triggered has increased given developments in Europe.

European inflation estimates were woefully below expectations at 0.7%, with the market expecting 1.1%. Recall the ECB has an internal target of 2%, so signs of disinflation will be of concern to them.

We also saw ECB member Ewald Nowotny talking about adding liquidity, presumably in the shape of another LTRO (longer-term refinancing operation). This is another EUR negative; however the prospect of this materialising won’t be until late 2014. However what is a concern is that the prospect of the ECB cutting rates next week has just increased markedly, predominantly to keep its money market rates from moving any higher.

The interesting thing for me though is the limited falls in EUR/USD, especially given the blockbuster Chicago manufacturing print. It will be an interesting session ahead, however Fed member James Bullard is due to speak and he is as dovish as they get on the Fed and thus this could put a bid in EUR/USD.

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