Return of risk appetite weighs on global core bonds In a thinly traded session (London closed), global core bonds slid gradually lower as equities were well bid on investors enthusiasm after Friday's Bernanke's comments. However, the biggest slide came after stronger than expected US July spending figures. Euro slightly higher as sentiment on risk improves On Monday, global investors were inspired by Bernanke's comments at the Jackson hole Fed conference. The euro was well bid, but EUR/USD and EUR/GBP failed to regain high profile resistance levels. Will the current risk rally be strong enough to trigger a more pronounced up-leg of the single currency? We are not convinced. The Sunrise Headlines Yesterday, US Equities extended their rally, that started on Friday. The S&P jumped 2.83.% higher to end above the first resistance level at 1 208.47. This morning, also Asian shares trade in positive territory. US President Barack Obama, under pressure to spur job growth, said yesterday he had chosen Princeton labor economist Alan Krueger to become the top White House economist and added that he will offer a jobs plan next week. The European Central Bank is reviewing the risks to price stability ECB President Trichet said yesterday, suggesting that the bank could tone down its view on inflation pressures and keep interest rates on hold well into next year. The International Monetary Fund has slashed its growth forecasts for the United States for both this year and next and added that the Fed and ECB must be ready to ease policy, Italian news agency ANSA reported yesterday citing a draft of the IMF's World Economic Outlook. Japan's jobless rate rose for a second straight month in July, while retail sales slipped for the first time in four months, suggesting that Japan's post-earthquake recovery is leveling off. Brent crude oil prices ($112.33) rose yesterday for a sixth consecutive session supported by a rally in equities and encouraging data from the US. Today, the eco calendar contains the European Commission's confidence indicators, US Conference Board's consumer confidence, Belgian and Spanish CPI and the UK mortgage approvals. The Fed will publish the minutes of its latest FOMC meeting. Currencies: Euro Slightly Higher As Sentiment On Risk Improves EUR/USD On Monday, it was a classic risk-on day which caused the standard reactions in most market, including in the currency market. Global investors still drew confidence from Bernanke's speech at Jackson hole. Most analysts were confident that the Fed is still there to support the economy if growth continues to disappoint. The positive global sentiment on risk and the strong performance on the European equity markets also underpinned the single currency. However, even as risk appetite stayed positive throughout the day, the intraday trading pattern of EUR/USD remained rather volatile as the pair hovered up and down mostly in the lower half of the 1.45 big figure. So, the day-to-sentiment on the EUR/USD cross rate was positive but global issues obviously prevented a clear uptrend. In this respect, there were quite some headlines on Lagarde's comments as she said that European banks needed more capital. The data only had a limited impact on trading. US private spending was better than expected and supported the rally on the (US) equity markets. In this respect, it was also a slightly positive for the single currency. A news agency reported that the IMF would sharply reduce its US growth forecasts for 2011 and 2012. The downward revision for Europe was said to be less. However, these headlines were not able to spoil the gains on the stock market. The hope for some kind of 'Bernanke put' continued to support risk taking. At the end of the day, EUR/USD was still in positive territory, but the gains were far from spectacular. The pair closed the day at 1.4511, compared to 1.4499 on Friday evening. Today, the calendar is well-filled. In Europe, traders will look out for the EMU confidence data. A further decline is expected for all sectors of the economy. Also the performance of the individual countries is interesting (not only the periphery, but also the development in the core economies). Of course, after the recent indicators from member countries, a deterioration in economic sentiment shouldn't come as a big surprise. So, we don't expect a big impact on EUR/USD trading. Markets will also keep a close eye on the outcome of the Italian bond auction. The ECB bond buying has brought the yield levels for Spain and Italy back to more 'sustainable' levels. Interesting to see investor appetite for Italian bonds at these reduced yield levels. A difficult auction could weigh on the still fragile investor sentiment. However, we don't expect such a scenario. In the US, the CS house prices and the consumer confidence will be published. Especially, the later might be of intraday importance for trading. We don't expect the indicator to bring a (big) positive surprise. Later in US trading, the Minutes of the previous Fed meeting will be published. We already have quite some info on the Fed thinking after Bernanke's Jackson hole speech. Nevertheless, the debate on the Fed's decision to keep rates near zero until 2013 remains interesting. More indications that the Fed also discussed other means of policy stimulation might be (slightly) negative for the dollar. To summarize: global sentiment on risk remains an important factor for EUR/USD trading. For now, sentiment looks reasonably positive, but looking at yesterday's price action, the question is whether the current 'risk-rally' will be strong enough to inspire a break of EUR/USD above a series of resistance levels that are lining up. We are not convinced that will be the case. For that to happen probably good news on some kind of a solution for the EU debt crisis is needed. We don't have the impression that this political debate is already in a final stage. Global context. Since the EU summit on July 21, EUR/USD held within a remarkably tight sideways trading range. The outcome of the meeting was unable to prevent further contagion on the EMU government bond markets. On the contrary, Italy came also in the fire line. In theory, this should have been a negative factor for the euro. However, markets still saw a balance of weakness between the euro and the dollar as the news flow from the US was also far from inspiring. Recent eco data indicated that the US might be at the brink of a double dip recession and the outcome of the US budget debate illustrated that US policymakers have no comprehensive plan to address the debt situation. S&P downgrading the US AAA-credit rating reinforced this feeling and weighed on the dollar. The Fed committing to extend an extremely accommodative policy at least until 2013 was also no help for the US currency Since the 21 July EU Summit, EUR/USD hovered sideways in a range roughly between 1.4050 and 1.4500. Trading in the EUR/USD cross rate for a big part decoupled from the high level of volatility in most other markets. A series of high profile resistance levels is lining up (previous highs at 1.4537, 1.4578 and at 1.4697). A sustained break above this area would open the way for a retest of the year high at 1.4940. Until now we assumed that quite a high profile trigger would be needed to clear this short-term resistance. For now, we hold on to that view even as we can't ignore that overall dollar weakness is pushing the pair higher at this stage

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