The Euro-zone economy will inevitably remain a key short-term focus, especially with a summit due on Thursday. Confidence will remain very fragile in the short term, but any kind of support package for the weaker economies could trigger near-term Euro relief, especially given the number of short positions in the market. The US dollar will still tend to gain some defensive support on a shift away from riskier assets while support on domestic fundamental grounds will be limited. Overall, the best strategy looks to sell EUR/USD rallies above 1.3750.

The Euro was confined to narrower ranges during Monday as support levels near the 1.36 region against the dollar held while there was resistance above the 1.37 level.

Underlying sentiment towards the Euro-zone economy and Euro certainly remained generally weak as debt fears surrounding Greece and the other peripheral countries persisted. Spanish bonds rallied strongly during the day on a statement of reassurance from the government and this also provided some wider relief to the Euro.

The EU summit, due to be held on Thursday, will be watched very closely and any positive move surrounding a support package for Greece could provide further near-term currency relief. It will be much more difficult for the Euro to secure sustained relief as underlying tensions persist. There is also likely to be some speculation that the ECB could be forced to cut interest rates which will remain a negative factor for the currency. There will also be unease over a decline in the Sentix business confidence index to a four-month low as any deterioration in economic conditions would tend to intensify budget pressures.

There has already been a big shift in market positioning towards selling the currency which may offer some significant degree of Euro protection given the scale of recent losses.

There were no significant US developments during the day with dollar moves still determined to a large extent by degrees of defensive demand. Fears over the US budget situation is still likely to unsettle the dollar to some extent and the Euro looked to consolidate above the 1.3650 level.