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By Dean Popplewell

This market is struggling to come up with anything innovative ahead of Jackson Hole in fear of being caught badly offside with any surprise outcome from Bernanke’s speech. It’s no wonder that there is a stranglehold on volatility, especially more so now that we are creeping upon the EUR’s 100DMA at 1.2595. This market is unwilling and reluctant to take on any new positions so late in the game. If anything, investors have mostly been paring back some of that record -$19.3b EUR short position as recorded on the CFTC last week. Already there have been many tight short single currency stops triggered by some surprising sources so far this week, from month end requirements to an unexpected Spanish and Italian bill auction and Draghi's missing presence from Jackson Hole. One gets the distinct feeling that this market requires at least another decent EUR purge before Ben’s Friday speech.

Earlier this morning we got to see Italian retail sales unexpectedly rise in June, increasing +0.4% from the previous month in seasonally adjusted terms. According to ISAT, the uptick was led by buying of non-food items which rose +0.4%, while food sales rose +0.2%. The market had been expecting the headline data to slip for the fourth consecutive month (-0.2%), despite the surprise, retail sales in the euro’s third largest economy remains down -0.5% year over year in unadjusted terms. Despite the headline print, the Italian recession remains steadfast in its fourth consecutive quarter.

Already being reported this morning stateside in the WSJ is the fear that the already debt-ridden Spanish region of Catalonia will request an emergency +€5b credit line from the Spanish central government as the region struggles to refinance its debts. If so true, this certainly emphasis the market's uneasiness about the eurozone's debt crisis only days before Draghi and his fellow policymakers are expected to unveil details of its revamped bond-buying program. Not appearing at Jackson Hole gives them much needed time to fine tune their market presentation.

The EUR rally yesterday was impressive, albeit on some “flaky reasoning.” Draghi not making Ben's speech so therefore he must be working on a “big plan” for next week's meet is very much a stretch, just like Spanish and Italian yields aggressively falling. Peripheral yields on the week are in fact higher, while Draghi always had the tendency to disappoint. Today we have Merkel meeting Monti, meaning that the EUR is in danger of being headline driven. While in the U.S., GDP and pending home sales may be able to give investors some guidance to Ben’s stance this weekend.

Aug 29

So far the EUR has its range of 30-70, and with 1.2590-95 a key resistance topside being its 100DMA, which if breached, could trigger another nasty short covering run like that seen earlier in the week. At these lofty levels you get the general feeling that the market is overbought with natural layers of resistance up to the figure which should keep the natural bias to the downside. The retail sector, which has built up the largest net short EUR in some time, is in danger of being taken out of these positions a tad quicker if EUR upside momentum persists as they may have shorted the market a little too early.

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