The euro has spent the morning undergoing recovery after an unexpected sell off during late Thursday - cause unknown. One would think that a super-charged equity market rally would have stuffed the euro with confidence to break to new highs for the week but instead of rising to the challenge, it wimped out falling to $1.4125. Yet more confident data from the Eurozone and words of confidence from two ECB members have nursed the euro back to $1.4220, while weakness in U.S. stocks after a couple of earnings misses now leave the euro vulnerable to thinner Friday markets. Once again the short-term technical picture fills us with trepidation.

Comments from two ECB officials who had earlier argued for more rather than less asset purchases than the ECB settled for were out with bullish notes surrounding the economic picture. Austria's Nowotny in an email exchange with a Bloomberg reporter noted that the economic picture had brightened recently for the first time in a long time. The text of a speech to be delivered in Nicosia by Cypriot central banker, Orphanides spoke of the prospects for recovering growth in 2010. Doubtless the burning question to either policy-maker would be whether they stand by their previous requests for more stimulus rather than less. We'd argue in the affirmative given the likely length of time it will take Europe to crawl out of the hole.

To understand what's happening in the bigger picture, we note that government bond prices are rebounding today in both Europe and the U.S. despite broadly more supportive Eurozone data accompanying stronger stock markets there. In other words the euro isn't getting a boost from the perception of tighter monetary conditions.

In Germany the all-important IFO business climate survey rose to 87.3 in July for a nine-month high, while a composite manufacturing and survey sector survey by Markit Economics rose to read 46.8 in July. This is a diffusion survey in which a reading of 50 divides expansion and contraction equally. The contraction within today's reading is the slowest in almost a year.

Markets are extremely good at thinking out loud and what we see in price discovery in very liquid markets like those for currencies provokes questions at the back of traders' minds. What if the Eurozone recovery is today as good as it gets?

A case in point was revealed today in the United Kingdom, where shock upon shock, growth for the second quarter contracted unexpectedly at the largest rate on record since records where first kept in 1955. The 5.6% contraction on a year over year basis meant a 0.8% contraction between first and second quarters. The survey expectation ahead of the number was for a 0.3% decline and so given the apparent recovery in both activity and confidence in Britain during these months, today's report is a real challenge to the perception that recovery really has taken hold. It also undermines any sense of urgency in raising interest rates and while we won't argue with the notion that policy tightening might begin sometime during 2010, it's one of the arguments swept off the table today. Investors consequently sold the pound today sending it down to $1.6440 against the dollar.

Missing any sense of logic today is the performance of the commodity currencies. The Canadian dollar continues on a northerly trajectory against its southern neighbor to buy 92.35. We make that just shy of the year-to-date high at approximately 92.71. The Canadian dollar was buoyed again yesterday as Bank of Canada governor, Mark Carney referred to the recovery as nascent and noted that domestic currency strength was a brake on growth. Hardly harsh words and not enough to stave off buyers.

The Aussie unit also gained to 81.45 cents. In both cases if we had to explain this anomaly of commodity-rich dollars rallying  in the face of equity market weakness we'd point to prices of crude oil at $67 per barrel in the September contract and August gold still above $950 per ounce. One signals little pessimism in the prospects for global recovery and ongoing energy use, while the other represents the fear of a loss of value to the greenback.