Eyes are surely still centered on the European continent with the mixed sentiment over what to expect from the ECB and the EU till the end of the week, the risk of failing again to come through to markets is indeed at its highest especially as we can sense some hope that something big is on the way!

Volatility is evident in the market and that is reflecting on the euro with cautious and choppy trading. We can surely see the mixed news from across the region that reflect the tension and the fears that embedded with hope that they will meet the task this time as it surely will be their last.

S&P flared the jitters with the start of the week with the downgrade threat to the euro zone grantors and the EFSF but again that did not last after the Financial Times reported that the EU is considering a bold move this week by combining the standing EFSF with the ESM that comes into effect next year which will also involve support from the IMF and even provide the framework for possible ECB support. This sentiment surely helped the gains early in the session from Asia and still supporting European equities higher.

The news were taken positively in the morning for the euro yet we can see the currency again surrendering the gains versus greenback as the clock ticks and reports quoted a German official dismissing the report and saying the talks are in private which further pressured the euro.

The EUR/USD is currently hovering around $1.3375 down by nearly 0.2% after it recorded the high of $1.3452 the pair reversed lower and as we can see over four-hour basis move to the downside and supported by the negative crossover on Stochastic from around overbought areas. The conflict though is seen over daily basis with the Stochastic entering oversold areas and accordingly that might support the pair to attempt rebounding to the upside again as far as it holds above $1.3315.

Investors are hoping that the EU will present something solid yet they remain fearful and pessimistic in general over the outlook for the euro area in terms of macroeconomic and financial stability. The economy is surely feeling the heat and the financial system in the euro area is under heavy pressure, the yields are coming off highs and a good auction from Portugal and Germany eased the woes yet the banking system is still clearly under pressure.

The strain on the financial system is seen but also they are still taking advantage of everything the ECB can offer. Demand on the ECB three-month dollar loans surged today as the back allotted $50.7 billion on the new lower rate which was at a fixed 0.59% the first since the coordinated move and surged from the previous operation when the ECB allotted $395 million and as for the one-week loan the ECB allotted $1.6 billion, it is a sign of strain but also a sign of caution ahead of the decision from the ECB and the EU as a disappointment there will surely leave the banks low on liquidity and the preferable ECB lending rates remain the safe bet for now!

As we said and we remain again, it will remain about the euro and the EU till the end of the week and into the coming week as investors react to what the leaders will present which likely will remain pending till after the market ends for the weekend! The USDIX is currently recovering some of the early losses on the market tension and volatility though clearly once the euro rebounds again and holds from extending the losses the dollar will return south. The index is currently hovering around 78.62 higher by 0.13% and off earlier lows set at 78.29 and near the intraday day high set so far at 78.68.