Watch $1.4880 in the Euro for Dollar Direction

There is much talk in the markets about a double-no-touch structure between $1.48 and $1.51. However, more immediately we think the $1.4880 area is a key pivot. A move above $1.4880 would take neutralize the downside pressure on the euro and point to a retest on the $1.4960-$1.5000 that has capped upticks over the past few sessions.

In conversations with clients, two things continue to be noteworthy. First is the extent of the negative dollar sentiment. The dollar bears are numerous and with the dollar falling since the start of Q2, it continues to seem to be a crowded trade.

Second, the market is nervous. It has not embraced the euro in its own right, but rather has moved toward the euro because it is not the dollar and is the liquid alternative. The nervousness of the long euro holders is evident in the options market where the premium being paid for euro puts over euro calls (equidistant from the forward strike) made a new high for the year today at 1.19%. In contrast, in early June when the euro was just getting above the $1.40 level, the market was paying a similar premium but for euro calls not puts.

Interest rate differentials continue to move against the US. This week alone the 2-year note spread moved almost 25 bp in Germany's favor over the US. The June 2010 Euribor-Eurodollar spread is making new highs (in Europe's favor) today. This is not the stuff that is usually associated with a dollar bottom. On the other hand, the technical condition points to the vulnerability of the euro (and other foreign currencies by extension). More talk of a double dip in the main economies, disappointing economic data, some increased concerns about the financial fragility are serving to slow the risk-on trades and give the dollar a sense of stability.