The ECB will want to hold firm in the near term, but pressure on the bank will increase with the Euro sold on rallies

The dollar probed levels below 1.46 against the Euro on Wednesday, but was unable to sustain the gains and weakened back to trade within a narrower 1.46-1.4650 range. The dollar was over-bought on a near-term view after the strong gains seen over the previous 24 hours and this made it more difficult to break the important resistance levels below 1.46. The weaker trend in global equity markets provided some further support to the US currency.

The ECB interest rate decision and statement will be very important for the markets on Thursday and there was caution in early European trading with the dollar little changed. The Euro will move very sharply if interest rates are changed, but a steady policy is the most likely outcome in which case the statement following the decision will be watched very closely.

A more moderate stance from President Trichet would increase market speculation that the bank is shifting towards a cut in interest rates which would tend to undermine the Euro. The ECB will want to maintain a tough stance on inflation and is unlikely to change policy substantially today. The Euro will not gain support from a firm approach if growth indicators appear to be deteriorating further.