A tough ECB stance would support he Euro, but the downside Euro-zone risks are also likely to grow
The dollar was unable to make any headway through 1.5680 against the Euro on Wednesday and weakened sharply to lows beyond 1.5865 in US trade before stabilising.
The ECB will announce its latest interest rate decision on Thursday and the most likely outcome is that rates will be left on hold at 4.0%. If so, then the statement from ECB President Trichet will be very important for Euro sentiment. Markets will be monitoring official comments both on interest rates and the currency very closely. The ECB is still seriously concerned over inflation threats within the Euro-zone and the bank is likely to maintain a tough approach, although Trichet is also likely to issue warnings over growth trends which will curb Euro support.
The ECB President is likely to voice further opposition to excessive currency moves and the Euro will be vulnerable to more substantial selling pressure if there is more aggressive rhetoric against Euro strength, especially with G7 meetings starting on Friday. Volatility levels are likely to be high over the next 24 hours with the dollar temporarily pushing to record highs just above 1.5910 in Europe on Thursday.