After today’s ISM manufacturing index (49.9) printed unchanged vs. the previous month and vs. consensus (both at 50), we think an important short-term risk for a further downward correction in EUR/USD has been removed. While in recent weeks we have been cautioning against buying into the EUR/USD correction too early, we think that the risk/reward of such a trade has now become more favourable. We therefore open a new short-term trading idea: Buy EUR/USD, currently 1.452, target 1.50, stop 1.44.

Reason: Over the medium- to long-term we continue to believe in a strong recovery of the USD versus the EUR, because the economic conditions in the euro area will force the ECB to ease its monetary policy in the first half of 2009, which should generate more pressure on the euro. But it is still too early for this right now, and the pendulum of market sentiment has moved too far from exclusive US pessimism to comparably one-sided EUR pessimism in recent weeks . Because rate cuts are still not on the cards for the ECB and the Bank is likely to make this perfectly clear to the market on 4 September. Consequently, speculations about a quick rate cut by the ECB, which have recently generated intense pressure on the EUR/USD rate, are likely to be dashed, triggering a countermove in EUR/USD. Moreover, we are more pessimistic than consensus about the US labour market report scheduled for release on 5 September, and we thus see significant potential for a temporary rise in EUR/USD to 1.50 during September. In our view, though, this will only constitute a rebound in a larger downward trend, that will lead EUR/USD markedly lower in the coming twelve months (compare today’s focus FX).