The EUR/USD pair was mired between two conflicting impacts yesterday as Trichet tried to cap the euro ascent, while Fed??™s Bernanke shot down all hope for a USD rebound. The markets thus yesterday were rather calm despite these heavy guns firing again. This morning, the bleeding started again on the forex market, with new highs for EUR/USD. The news by S&P that a CDO of State Street had gone into liquidation raised worries for more forced selling to follow, triggered by downgrade events.

But lets??™ first take a step back to yesterday, because what Trichet said was very interesting. It is a signal that the ECB is opposed to further fast euro gains. He said that recent moves had been ???undoubtedly sharp and abrupt??™ and he added that ???brutal moves??™ were never welcome.

The watchword here is "brutal". Trichet has in the past used this word on two occasions. Both in January 2004 and 8 November 2004, he described the rally in EUR/USD as ???brutal??™. On both occasions it didn??™t really impress the FX market for long. At the time it took some further convincing as the pair reached highs at 1.36 end December 2004.

That proved the high point however for that rally and by the time Trichet went on to say on 14 January 2005 that ???forex moves (higher euro) are unwelcome for growth and are undesirable??™, EUR/USD had fallen back to the 1.32 area.

We believe his warning is not to be taken too lightly. The market doesn??™t react yet, as for now the situation appears to be different. Business and consumer confidence in the Eurozone looks currently stronger than it was back then, but it is showing signs of deterioration. The corporate and political backlash to the strong euro is not as high too for now. However, if Trichet keeps hammering away at this message, this will start to impact FX and hold back the euro versus the dollar and the yen, which could be the big gainer, by default??¦

The dollar just couldn??™t be bothered to strengthen for now as confidence is so low: Bernanke stressed downside risk on economic growth, while the news of S&P/State Street is apparently used as another excuse to sell the dollar. That brought the EUR/USD pair to minor new highs at the 1.4739 zone again this morning.

Today, the market can take a look at the US trade balance or Michigan consumer confidence, but financial turmoil may draw more attention/impact. We will have to see how far this State Street story carries for instance.

USD/JPY laid down a sideways profile, but with large gyrations between the 112.20 and 113.20 zone. We feel USD/JPY has unsuccessfully tested the 115.30 zone resistance last week and as it failed to sustain above, this indicated that there is some downward scope in a buy-yen??“on-dip scenario near term. Now the USD/JPY pair has also broken below the 113.25 neckline of a double top. This aggravates the pic-ture??¦The news of State Street could be important if its spills over to other CDO??™s and cause another ???market run??™ as we??™ve witnessed in late August. For now everybody reacts calmly, but we do like to point out the risk to shaky sentiment at this stage.

US secretary Paulson repeated the mantra that a strong USD in the US interest and that currency values should be based on economic fundamentals. This is a hollow phrase for the market and we feel the US underestimates the chance of a disorderly decline for the USD at this stage. That would be a huge economic risk, driving up interest rates at a time when the economy (and financials) are particularly vulnerable. Wasn??™t it Murphy??™s law that stated ???if something can go wrong, it will go wrong??™? Fed??™s Bernanke yesterday also acknowledged that the weak currency ???had the potential to boost inflation in the longer run??™.

Yesterday was also ???China bashing day??™ with Paulson, Bernanke and Trichet all calling on a more ???flexible??™ or stronger yuan.

EUR/GBP stayed steady at the 0.6965 area, within the usual intraday gyrations; this is not the pair where the action is for the moment. The renewed financial turmoil of the past ten days in the US for now hasn??™t spilled over the ocean to the UK and that is fortunate for the sterling which suffered on the first financial wave, with Northern Rock still as struggling victim.

The BoE and the ECB kept rates unchanged yesterday and gave no input for EUR/GBP. We look for sideways trading between the 0.6890 and 0.7030 zones.