The very high number of speculative short Euro positions will maintain the possibility of a squeeze, especially as there will be a reluctance to hold aggressive short positions ahead of the holiday weekend. Tensions surrounding Spanish debt may have eased slightly for now, but underlying stresses will continue and fears could return rapidly given the overall debt profile. There are also liable to be net capital outflows from the Euro area. The pattern is still therefore, likely to be of corrective Euro rallies within a weaker underlying trend. Overall, there is scope for the Euro to extend gains to the 1.25 area in the very short term on position adjustment where selling pressure is likely to intensify again.

Immediate fears over the Spanish debt situation eased slightly on Thursday which tended to curb further Euro selling. There were denials from Chinese authorities that they would look to reduce their Euro-zone debt holdings which helped stabilise sentiment towards the currency. Interbank money-market tensions also eased slightly which curbed defensive dollar demand.

The US economic data was weaker than expected with first-quarter GDP revised down to an annual rate of 3.0% from a provisional 3.2%. There was a decline in initial jobless claims to 460,000 in the latest week from a revised 474,000 previously, but this was higher than expected which will raise some doubts over labour-market strength. The dollar gained ground following the release, but the Euro gained support from the ability to withstand a further attempt to break technical support close to the 1.22 level as position adjustment remained an important focus.

Risk conditions stabilised during the US session and there was a notable covering of short Euro positions. In this environment, the Euro rallied strongly to highs near the 1.24 level later in the New York session. With US and UK market holidays on Monday, there will be further speculation over a covering of short positions during Friday and choppy trading positions are liable to continue. The Euro retreated to the 1.2320 area on Friday as there was still interest in selling rallies.