The Euro will be vulnerable to initial selling pressure if there is a dovish stance from the ECB, but the overall risks suggest that there will be good buying support on dips.
The Euro was unable to hold above the 1.30 level on Wednesday and weakened steadily during the day. The Euro was undermined in part by a downgrading of Russia’s sovereign credit rating which increased speculation that there would be further selling pressure on the Russian currency which tends to undermine the Euro. There was also a wider increase in fears over Eastern Europe which had a significant negative impact on the currency.
The European data did not have a major impact with a small downward revision to the PMI services-sector index while retail sales volumes were unchanged in December to give a 1.6% annual decline.
The ECB interest rate decision will be watched very closely on Thursday and a reduction in the main financing rate would tend to weaken the Euro given expectations that rates will be left on hold. The press conference will also be very important with the ECB is likely to warn over growth conditions and signal again that the March decision will be very important.
The Euro bounced from support levels near 1.28, but was unable to make any significant headway with choppy trading set to continue. The Euro held just above 1.28 in early Europe on Thursday, hampered by another sharp decline in German industrial orders.