Fundamentals

The Euro will struggle to sustain initial gains following the ECB interest rate decision given the increased growth fears.

Inflation will inevitably be a key focus for the ECB at its policy meeting on Thursday, although the bank will also be wary of credit stresses and growth fears.

The most likely outcome is that there will be a 0.25% interest rate increase, although there is a small possibility that the bank will announce a 0.125% increase. There is also the possibility that there will not be a unanimous vote. The Euro will tend to gain support if there is a rate increase and tough rhetoric from the bank while a decision not to increase rates would undermine the currency sharply.

The Euro will also weaken if the ECB takes a dovish stance in the press conference and warns over financial-sector risk. The PMI index for the services sector was revised down to 49.1 in June from 49.5 and growth fears will limit the scope for Euro gains.

Official comments on the dollar will need to be watched very closely given speculation over a move to intervene to support the US currency. The Euro was little changed at around 1.5870 in early Europe on Thursday. Volatility is liable to rise sharply in New York trading on Thursday, especially with a US market holiday on Friday.