An especially quiet night of trading in the FX markets as various religious and national holidays have curbed order flows this week. The EUR/USD briefly touched the 1.1900 level but bounced back trading at 1.1930 by midday in Europe. Both EZ PPI and Unemployment figures printed within expectation providing no volatility to the market.

In light of firmer US eco data the move below the 1.2000 figure in the pair is completely understandable. Yesterday's ISM Manufacturing numbers which exceeded expectations by full 7 points, reaffirmed the dollar bulls argument that US economic demand remains strong. The move in the EUR/USD was further accelerated by poor market positioning, as our own internal SSI index reached near extreme levels with 2.5 euro longs for every dollar long. With everyone trying to find the bottom, is it any wonder that it didn't materialize?

Yet despite the dollars impressive rally we believe that most of the down move in the EUR/USD is behind us. With Schroeder now willing to concede to Merkel, the political risk that has hung over the euro for the past two weeks will soon dissipate. Meanwhile, although US production data is inarguably better than expected, the question remains: with US consumer sentiment at decade lows, who will the producers sell to? Some analysts including Michael Shedlock even speculated that the rise in ISM was due to post-Katrina hoarding as companies feared scarcity of inputs. Should they have a hard time working off this inventory build, the numbers will not be nearly as rosy in the future. Finally other positioning measures, including the latest CME's Commitment of Trader's Report are showing very skewed results especially in the Swiss franc contract which registered a 99% extreme with specs wildly long the dollar while commercials are long the Swissie.  Thus a word of caution to dollar longs. On the CME at times of extreme positioning it rarely pays to be on the side of the speculators.

Boris Schlossberg is a Senior Currency Strategist at FXCM.