The key feature is that confidence in both the Euro and dollar will remain weak in the short term as both currencies have very important vulnerabilities. Overall, there is scope for the Euro to correct stronger towards the 1.2860 region before selling pressure returns.
The Euro is being undermined by further stresses within the Baltic and Eastern European economies as sentiment towards the European banking sector remains weak with fears over escalating losses. Bond spreads within the Euro area will also continue to be watched closely with a further widening on Tuesday notably for Irish and Austrian bonds.
Confidence in the global financial sector also remains extremely weak and this is continuing to underpin the US currency by default as defensive demand continues with evidence of substantial outflows from emerging markets.
Dollar Libor rates again edged firmer on Tuesday which illustrated the degree of stresses within the credit markets and this will tend to underpin the dollar. With no major US data releases, degrees of risk appetite will tend to remain the dominant influence, although Fed Chairman Bernanke€™s comments will also be watched closely.
Confidence in the US economy will remain extremely fragile as GDP continues to contract rapidly. In this environment, there is still the threat that confidence in the currency will also reverse rapidly. The US currency pushed to highs near 1.2550 in early US trading on Monday before weakening back to 1.27 on Tuesday as the dollar was unable to take out important Euro support.