FXstreet.com (Barcelona) - A worrisome risk aversion tone settled in Asian trade, with possible ramifications in European markets. Investors were reminded once again China has plenty of catch up to do following a 47.8 print in the HSBC China manufacturing PMI, pretty much unchanged from the final Aug reading, which stood at 47.6.

However, it's in the details that traders noticed things getting worse, with the print being the 11th consecutive month below the 50.00 threshold, and Manufacturing output sub-index crashing to 10 month low at 47.0. The Shanghai stock market fell almost 1.25% and this has been the strong component kicking the risk-off ball rolling.

According to Sean Lee, Founder at FXWW: “I’m now in sell rally mode on pairs like EUR/JPY, EUR/USD and AUD/USD as risk appetite wanes in Asia. There are plenty of buyers still around in EUR/USD and AUD/USD so I prefer to wait for 30 pip rallies before entering." It has been reported by Reuters financial branch IFR Markets that there is a strong battle going on between stops sub- 1.2975 and above 1.3175 having the market stalled.

EUR/USD looks top-heavy

As readers were reminded during yesterday's Europe open report,the case is building for further downside in the EUR/USD, which after taking out 1.3080, it has seen commited sellers stepping in to protect the level, with neither European nor American traders able to regain the level in yesterday's trade, an early indication bears are temporarily matching bulls power.

“Unless the bulls can re-take this level at 1.3070/80 soon, we will probably get a deeper retracement towards 1.2915. Risk-reward would seem to favour selling intraday rallies with a tight-ish stop, especially now that EUR/JPYhas broken it’s support levels. Turnover has been very heavy in the last 48 hours, concentrated firstly near 1.3080 and then around 1.3010” Sean Lee adds.

Another technical indication is, as Valeria Bednarik, Chief Analyst at FXstreet.com, notes, “the pair has been posting lower lows and lower highs which suggests the downside is still exposed. Renewed selling pressure below 1.3000 exposes the 1.2930 area, 61.8% retracement of this year fall. Although not seen, a daily close below that level will exacerbate selling interests with 1.2745 then at sight.”

Fan Yang, technical expert at FXTimes, notes: “There is a chance for a pullback from the 1.30 psychological handle, but if the market holds below 1.3080, especially if it remains under 1.3050 and the declining trendline seen in the 1H chart, the focus will continue to be on the 1.30 handle with bearish intent in the short-term. A break below1.30 will be followed by a challenge from the September rising trendline, but the next support pivots will be at 1.2875 and 1.2815.”

Nomura, Saxo Bank suspicious more downside may come

A bank that agrees on the EUR/USD bearish prospects is Nomura, with the latest FX revisions expecting no further EURUSD upside in the coming months, "unless a more convincing risk premia compression, capital flow improvement or a return of growth" strategist at the bank said.

Nomura adds: "Our central case is that EUR/USD will consolidate in the 1.25-1.30 range into year-end. Looking into 2013, we see risks as skewed towards another increase in the euro risk premium as a persistent growth crisis feeds into resurfacing solvency concerns, and we forecast EURUSD to trade at 1.20 by mid-2013."

Another bearish view is presented by John Hardy, Head of FX at SaxoBank, who notes, “EURUSD has nominally survived an attack on the 1.3000 level, but there is a lot more room for consolidation without threatening the recent move up, as we would have to work all the way back below the 1.2750 area to really talk full scale reversal.

Spain bond auction; EU's Rompuy & Barroso and China's Wen at EU-China Summit

For the London session ahead, as noted by Ramon Casas, senior editor at FXstreet.com, "the Spanish sovereign 10 year bond auction will take center stage, as yields have been below 6% for last few days, and previous auction reached a 6.65% final yield. France will also sell up to € 10B in different maturities starting at 08:50 GMT."

According to David Corbell, analyst at IFR Markets: "Markets will be keeping a close eye on yield levels and whilst yields are little changed from the last 3-yr sale on Sep 6th (4% Jul 2015) we note that 10-yr yields have dropped by around 90bps from the Aug 2nd sale. Previous bid to covers were at 1.76 and 2.4 times for the three and 10-yr lines respectively. Given the ECB have shown their hand as a buyer of paper out to three years, it would be logical to expect that the shorter leg of Thursday’s auction will be the most palatable. The 10-yr leg however may present a bigger challenge."

From DailyChina: "The EC Herman Van Rompuy has said he will ask Beijing to shoulder more international responsibility when he meets with Premier Wen Jiabao in Brussels at the 10th summit with European leaders on Thursday. In an exclusive interview with China Daily, he said he also plans to deliver a heartfelt thank you to Wen for his 'extraordinary contribution' to the close interdependency between Beijing and Brussels over the past 10 years."