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Euro fails to sustain gains

The euro briefly climbed above 1.3500 on Wednesday extending its recovery from 1.3352 where it bottomed on Friday. However, EUR/USD was lacking in conviction and came under pressure after Portugal's PM said unemployment figures are worrying.

Meanwhile, the pound tumbled after BoE Governor Mervyn King said the bank's is unlikely to begin tightening monetary policy soon, arguing that such a move could derail a fragile economic recovery. The USD/JPY remained virtually unchanged on the day after a G7 statement left traders unclear over international policy makers' stance on the yen's sharp fall.

Aside from a few economic indicators – including US retail sales - headlines flow has been light and pairs were confined to narrow ranges. Elsewhere, stocks turned lower after a positive opening that led the S&P 500 to its highest since Nov 2007, as risk sentiment deteriorated.

"Although foreign currencies are up today, those moves are somewhat lacking in conviction, with markets still in something of a waiting mode ahead of this weekend's G20 meeting of financial officials", says Nick Bennenbroek, Head of Currency Strategy, Wells Fargo Bank. "Further foreign currency gains are possible, though perhaps not until after and depending on the outcome of that meeting".

Euro falls back below 1.3500

EUR/USD's rejection from the 1.3520 area and subsequent drop below 1.3500 have turned the cross' outlook negative in the short-term. With immediate support at 1.3425 (intraday low), there is scope to a steeper decline with 1.3400/10 as next target. Below this latter, the pair could fall toward 1.3308 (38.2% retracement of the 1.2660/1.3710 rally) with not much in the way.

Alternatively, if the shared currency manages to regain the 1.3500 level, it could attempt a rise to 1.3585/95, but regain of 1.3600 is needed to ease the immediate pressure.

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