Although the ECB has managed to stabilise sentiment towards the Euro to some extent, there are still very important structural vulnerabilities and sentiment could deteriorate rapidly. There will be unease over the threat of a US slowdown, especially given the sharp consumer credit drop. The dollar will, therefore, find it difficult to regain support on yield ground and will be vulnerable to selling pressure when risk appetite improves. Nevertheless, given the net international risks, capital outflows from the US should be measured which will curb downside risks.  Overall, look for further EUR/USD selling opportunities above 1.2720 given the underling Euro-zone financial stresses.

The Euro held firm in early Europe on Thursday with firm stock market trends again curbing any defensive demand for the US dollar. There was a mixed report from the IMF as it was more optimistic over the global outlook, but also warned over potential downside risks. There were concerns over the US outlook which also curbed dollar demand to some extent, especially with the IMF warning over the potential impact of a strong dollar.

As expected, the ECB held interest rates at 1.0% following the latest council meeting. Bank President Trichet adopted a generally optimistic tone in his press conference with comments that the economy was gaining momentum while he also stated that markets had been over-pessimistic towards the economy and stresses within bond markets.

The Euro pushed to a two-month high against the dollar close to 1.27 and after a bout of profit taking pushed stronger again late in the New York session.