Profit taking was the theme of the day, as EURUSD dropped more than 100 points from its Asian session high tripping stops along the way. For the past several days we have argued that sentiment and stalled price action in the EURUSD have been signaling the possibility of a correction and today the euro bears were finally able to seize control of the order flow pushing the pair all the way to 1.3729.

There was little in the way news out of the EZ with only a smattering of second tier business confidence surveys on the calendar. Nevertheless tonight’s economic reports may have triggered the change in sentiment as both French Production Outlook Indicator and Italian Business confidence survey both missed the mark with the latter hitting a yearly low. There has been a slow but steady accumulation of evidence that the high value of the EURUSD is becoming a serious concern for the EZ industrial sector. As such, tonight’s IFO may prove to be worse that market expectations putting further pressure on the ECB to remain neutral for the time being.

Tonight’s sharp correction may reflect a new understanding on the part of some market traders that expectations for a another ECB rate hike in September have been overly optimistic. Indeed the downward adjustment in prices appears to be the result of a more sober assessment of EZ growth going forward as high exchange rates begin to impact production. Still the correction in the EURUSD could be short lived if today’s Existing Homes sales data disappoints once again. Housing remains the Achilles heel of the US economy and traders will need to see some signs of stabilization in the sector in order to be reassured that the US economy is not headed towards a recession. Leading data offers little hope for dollar bulls with the latest NAHB survey reading hitting yearly lows. However with expectations already so low, the Existing Home data may prove more positive than the forecast which may be enough to continue dollar’s counter trend rally.

Although the European calendar was relatively barren, Australian docket produced a major upside surprise as CPI printed hotter than expected at 1.2% vs. 1.0%. The Aussie rallied for more than half a penny as speculators immediately eyed the possibility of a rate hike by RBA during the next meeting on August 8th. However, while the economic case for a 25bp rate hike may be sound, the RBA is certain to face political pressure to remain stationary in light of the upcoming Australian elections in October. Treasury Secretary Costello made a pre-emptive appeal for continued neutrality by noting that wage growth is modest and higher Aussie will keep inflation tame. Whether his argument resonates with Australian monetary officials remains to be seen.

Boris Schlossberg is a Senior Currency Strategist at FXCM.