The remarks from ECB Chairman Trichet will be critical for near-term Euro direction. A covering of short positions should offer some support, but the Euro will need a firm tone from Trichet to reverse recent losses.
The Euro briefly pushed back above 1.33 against the dollar on Wednesday, but was then subjected to renewed selling and dipped to lows below 1.31 before rallying. The currency again struggled to gain support ahead of Thursday’s ECB meeting with expectations that the bank would sanction a further rate cut of at least 0.50% to 2.00%.
Confidence in Europe was also undermined by larger than expected fourth-quarter losses by Deutsche Bank. The Euro was, however, damaged more by structural concerns than yield considerations. The currency dipped sharply after reports that the Irish government could seek IMF support. This was denied by the Irish government, but sentiment remained very fragile and there was further selling pressure when the Greek credit rating was downgraded by Standard & Poor’s.
The ECB cut interest rates by 0.50% to 2.00%. The comments from ECB Chairman Trichet will be very important for sentiment surrounding the Euro. A dovish stance and fears over the economy would unsettle the Euro while a concentration on medium-term stability would offer some Euro support