Underlying confidence in the Euro-zone economy and Euro will remain very weak. There will be fears over the economic outlook and political stresses will also be a very important feature. In this environment, there will be persistent fears over the Euro outlook, especially with ECB independence compromised. There will be unease over the threat of G7 action and the Euro is also over-sold after heavy selling. In this environment, there is the potential for corrective EUR/USD gains to the 1.2500 area. Euro rallies are still likely to be sold very quickly given the underlying lack of confidence with a medium-term move to at least 1.20 realistic.
German Chancellor Merkel stated on Wednesday that the Euro was in danger with a policy response needed urgently. The German decision to ban short selling also maintained fears over a lack of unity within the Euro area and there were fears that political tensions would intensify which would also contribute to economic instability.
There were a succession of market rumours during the day which contributed to a high degree of volatility. There were rumours that Greece would leave the Euro and this triggered sharp gains for the Euro on expectations that a new hard-currency area could be formed. There were also rumours of G7 intervention to stabilise currency markets and the Euro was able to secure strong net gains for the trading day as a whole.
The US consumer prices data was weaker than expected with a headline 0.1% decline in prices for April. Core prices were unchanged over the month to give an annual increase of 0.9%. The benign data will maintain expectations that the Federal Reserve will be able to maintain a policy of very low interest rates for an extended period.
The Federal Reserve minutes recorded that the FOMC had upgraded its growth forecasts and was cautiously optimistic towards the outlook even though there was the risk of a negative impact from European difficulties. The members were, however, also still concerned over weak bank lending and difficulties in the credit sector.
The Euro pushed to a high around 1.2425 against the dollar as there was a substantial round of short covering, but the Euro was unable to hold above 1.24 in Asia on Thursday as underlying confidence towards the Euro remained very fragile.