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The news flow have so far remained supportive for risk taking, as the euro invites a growing number of traders to buy into the notion that serious technical damage has been inflicted - through Wednesday's close above 1.31 - with a test of September 17th high at 1.3172 no longer looking a distant prospect. Well, let's go by parts...

Is the fundamental backdrop supportive for further EUR gains?

Market participants appear to be comfortably long EUR as the vote of confidence towards Spain eventually embracing a bailout continues. A reflection of the optimism is found on the Spanish 10-year yields at 5.46%, lowest since March. One cannot help but think that the market is screaming out loud that Spain will end up tapping a precautionary program (ECCL), or "Enhanced Conditions Credit Line", which in turn results for an activation of the ECB's OMT program.

Adding to the EUR positive news is that Moody's is now out of the way in terms of threatening to downgrade Spain to junk territory. Underpinning risk are also the high odds for an eventual next disbursement of aid to Greece as per the latest comments from the IMF, which said it is close to agreeing on the next tranche. On the contrary, some improving U.S. economic data may force some market players to price out the supper-aggressive Fed QE3.

Overall, however, the sky looks quite blue for the euro to visit September highs, one may think...

But another EU summit gets underway...

European leaders begin a two-day EU summit today (Thursday), and this time around, expectations built ahead of the meeting are low enough to think that even if the eurozone underdelivers on the banking, fiscal union, growth fronts, and providing no new clarity, there is little to be disappointed with. In turn, markets will surely be eying headlines related to Spain/German bailout positions as well as in Greece to move the euro.

As noted by IFR Markets Analyst Divyang Shah:

The reports over the last 24-hours have increased expectations that a bailout request from Spain will still be made this year and likely in November. However, the timing aspect remains uncertain, and a delay is as likely due to regional elections in Galicia & the Basque Country on October 21 and in Catalonia on November 25. An additional factor is that Germany is rumored to be looking to merge a Spanish bailout into one big crisis package that also involves Cyprus and Greece.

Is the EUR/USD upside break fatal for the interest of sellers?

Short-term talking, and if headlines are complacent as to respect the latest technical readings, it looks like the EUR/USD scrap through 1.3085 and subsequently 1.31 has led a large number of technicians to shift their gaze toward 1.3172 as a minimum topside target. The breakout of a descending trendline resistance coming from September 17 highs adds weight to the bullish case. Any downside break, seeing hourly support at 1.3080/85, where demand should be strong, and with a break below targeting 1.3050/55.

Jamie Coleman, Founder at ForexLive, comments:

Having broken above 1.3070, technicians can target a 1.3320-ish topside target. I'm basing that off the double-bottom in the 1.2805/25 area. Add about 250 pips to 1.3070, the intervening top between the bottoms and you get 1.3320. Buying dips back at 1.3070 with a 40-50 pip stop looks like a safe way to play it.

Commerzbank Analyst Kim Jones notes:

EUR/USD's breach of the short term downtrend has shifted the focus and the near-term risk to overhead resistance at 1.3173/80. This is the recent high and a double Fibonacci retracement. We remain wary of initial failure here, the market will need to clear this key resistance in order to introduce scope to 1.3487/1.3536. However, we see a pullback prior to any further gains possible. Interim support lies at 1.2995/75 (a 50% retracement).

According to Sean Lee, Founder at FXWW, playing the edges of 1.3080/1.3170 range is still the name of the game:

The big banks are reporting solid U.S. corporate and asset manager offers starting at 1.3150 through 1.3175. I'd play this range in the short-term with a mild bullish bias in line with the recent bull trend.

Mr. Lee adds:

The chatter in the professional market is that most of the big macro hedge funds have had a pretty flat year performance wise and the big question now is whether they make a big play towards year-end or simply batten down the hatches and start anew in 2013. My contacts in hedge-fund sales are of the view that the big macros will not be making any more big year-end plays and will reduce positioning from now to year's end. If that's the case, expect EUR/USD to move towards 1.3500 and the EUR crosses to also appreciate.

Source: EUR/USD: Serious Technical Damage To The Topside