The euro sliced through the 1.3000 level while the pound dropped below 1.4600 in early European trade as concern over ECB policy actions and some risk aversion flows in European equities weighed on high beta currencies at the start of the week. Comments over the week-end by ECB chief Jean Claude Trichet suggested that the central bank may lower rates by another 25bp to 1.00 percent while ECB Executive Board member Lorenzo Bini Smaghi said the bank’s benchmark 1.25 percent interest rate is “very close” to its floor.

The EUR/USD broke the key psychological barrier of 1.3000 in early Asian trade this morning after comments over the week-end by ECB chief Jean Claude Trichet suggested that the central bank may lower rates by another 25bp to 1.00 percent while ECB Executive Board member Lorenzo Bini Smaghi said the bank’s benchmark 1.25 percent interest rate is “very close” to its floor. The ECB council continues to be divided over the proper monetary policy path given the economic weakness in the region and this disagreement amongst policymakers has created tremendous uncertainty for the currency as traders deciding to sell first and ask questions later.

Massive redemption flows of about $45 Billion in European bonds and dovish comments from ECB President Jean Claude Trichet sent EUR/USD to a monthly low of 1.3064 in Asian trade today as the currency suffered losses for the fourth day in a row.

The big story in the financial markets today was not the improvements in economic data, but the improvement in earnings. The health of the financial sector is critical to the recovery in the U.S. economy and therefore investors are keeping a particularly close eye on the reports from the banking sector. In order for the global economy to have any chance of recovering, banks need to stabilize and start turning a profit so they will feel comfortable enough to lend. Therefore the better than expected results from Wells Fargo has been received positively by the equity and currency markets. The U.S. dollar sold off against the commodity currencies and rallied against the Japanese Yen. The dollar also gained strength against the euro and British pound, which is not in line with the improvement in risk appetite because of euro and pound specific reasons that we will discuss further in the respective sections.

You can never underestimate the hawkishness of the ECB. This morning, the central bank cut interest rates by 25bp to 1.25 percent, driving the EUR/USD sharply higher following the smaller than expected move. Here are 3 reasons why the ECB cut by 25bp instead of 50:

The ECB shocked the market by lowering its overnight rate by only 25bp to 1.25% versus consensus calls of a 50bp cut despite the worsening economic conditions in the Eurozone. The EUR/USD immediatey shot ot 1.3400 but traders will await the post announcement press conference with Jean Claude Trichet to draw further conclusions.

Buoyant equity markets reignited risk appetite in currencies tonight as both Asia and Europe extended the gains made yesterday in DJIA on the back of better than expected ISM Manufacturing numbers. The iSM report showed a small measure of improvement across most of its components fueling a rally in stocks on the belief that US demand may have finally stabilized.

The next 48 hours in the foreign exchange market should be very interesting as we look forward to three significant events that could trigger massive volatility in the currency market independently, let alone collectively. After some big moves earlier this week, most currency pairs have consolidated as traders wait for the European Central Bank interest rate decision, the G20 meeting and the U.S. non-farm payrolls report. The U.S. dollar strengthened against the Euro and Swiss Franc but lost value against all of the other major currencies. This consolidation should just be a precursor to a bigger move.

Tomorrow the ECB is expected to lower rates by 50bp bringing the overnight rate to 1%. Given the gloomy recent economic data t from the region, the rate cut seems almost pre-ordained. With EZ unemployment rising to a three year high of 8.5% while retail sales in Germany, the union’s largest economy, contracting by another -0.2%, the situation on the ground remains grim. Therefore the markets are pricing in a 100% possibility of a 50bp cut.

As officials met for the G-20 meeting currencies were mixed with no overall theme defining trade today. In Japan the TANKAN report recorded its worst reading ever but the data had little impact on USD/JPY. Instead the pair reacted to a Bloomberg story that the Obama administration was considering bankruptcy for the auto companies which spurred a wave of risk aversion that dropped the USD/JPY more than 100 points in a matter of minutes. However, the pair spent the rest of the night crawling back to 9900 with many traders now targeting the psychologically important 100 level for a stop run.

European equity markets were broadly higher in early morning trade fueling risk appetite in currencies as all the majors with the exception of the yen rebounded against the buck after yesterday massive sell off. The Asian and early European trade was characterized by strong carry flows with yen crosses helping to lift the euro the Aussie and the pound.

German unemployment reached a new high printing at worse than expected increase of 69K versus forecast of 53K and the month’s prior reading of 40K. The news suggests that the collapse of global demand which has seen industrial Orders decline as much as 30% on a year over year basis is finally having a negative impact on the labor market.

The euro and pound rose on the first trading day of the week as risk appetite returned to the currency market after US Treasury Secretary Tim Geithner promised to release details of a new plan to use a private and public partnership funds to remove toxic assets off the balance sheets of US banks. Both Asian and European equities rose providing a strong bid tone to the risk currencies. Cable rallied through the 1.4100 handle and euro approached the psychologically key 1.3000 level by midday European trade.

As we have promised, trading currencies have become more interesting following the interest rate decisions in Europe. The next 24 hours should prove to be just as exciting for forex traders with the February non-farm payrolls report due for release. The US dollar has rallied significantly ahead of the payrolls report, which is traditionally the single most market moving economic data for the EUR/USD. The cohesive rally in the US dollar and the price of gold along with the sell-off in US equities indicate that risk aversion is the main theme of the day. This also provides a clue on how the dollar could trade following Friday’s non-farm payrolls report (February Non-Farm Payrolls Preview).

As expected ECB cut rates by 50 basis point taking the overnight rate below the 2% barrier for the first time since the euro began. With Eurozone economy contracting by -1.5% in the latest quarter and unemployment skyrocketing across the region, the generally hawkish central bank had no choice but to ease monetary policy further.

Euro was lower in early European trade today dropping below the 1.2600 level ahead of the ECB rate announcement with market participants anticipating a 50bp cut in overnight rates to 1.5%. Traders were also eager to listen to Mr. Trichet’s post announcement press conference for any clues to future policy moves. In the past week a variety of ECB officials have hinted that the central bank may change its focus away from interest rate policy and towards quantitative easing.

Things will get very interesting in the currency market over the next 48 hours. The Bank of England and the European Central Bank will be making interest rate decisions on Thursday and non-farm payrolls are due for release in the US on Friday. Alone, any one of these releases could trigger significant volatility in the currency market but together, they could easily lead to major breaks especially since the EUR/USD and GBP/USD have been fluctuating within tight trading ranges. The US dollar traded lower against all of the major currencies except for the Japanese Yen. Risk appetite has improved thanks to a new stimulus package for China, more details on the Treasury’s $75B mortgage plan and a stronger than expected service sector ISM report. The Fed’s Beige Book report signaled worsening economic conditions across the nation, but that failed to cause a dent in the currency or equity markets.

The two biggest event risks for currency traders over the next 24 hours are the Bank of England and European Central Bank interest rate decisions.

The US dollar extended its gains against the Euro, British pound and Japanese Yen as the key players in the recovery story disappoints the market. Overall the price action in the currency market has been muted and the dollar lost ground against other major currencies such as the Australian and New Zealand dollars. US economic data was weak but the dollar rally continued as traders focused on external rate decisions. The central bank of Australia left rates unchanged while Canada cut theirs by 50bp; next up are the Eurozone and UK rate decisions, both of which are expected to lower interest rates.

Traditionally, EUR/GBP is known as the range trading currency. Compared to the other commonly traded currency pairs, it used to have one of the narrowest average daily and monthly ranges. For example, between 2005 and 2007, EUR/GBP traded within a 400 pip range.

The US dollar traded higher against the Euro and commodity currencies but remained unchanged against the British pound and Japanese Yen. The strength of the dollar can be attributed to three primary factors.

Over the next 24 hours, the Bank of England and the European Central Bank will be making interest rate announcements. The Bank of England is the only central bank expected to cut interest rates, but that does not mean that the Euro stay stationary. In fact, we expect some big action in both currencies, which could lead to more volatility for EUR/GBP.

There are 3 interest rate decisions on the calendar this week from Australia, the United Kingdom and the Eurozone. Only 2 out of the 3 countries are expected to cut interest rates but all 3 rate decisions and the corresponding comments from central bank officials should trigger some volatility in the currency market. Although the amount of easing is important, what will receive more attention are the comments on how much further these central banks could cut interest rates. The upcoming rate cut is not expected to be the last for the Reserve Bank of Australia or the Bank of England and the expectation of further rate cuts could prevent a major recovery in the Australian dollar and British pound.

The EUR/USD continued its post FOMC tumble all night long in Asian and early European trade as the worst German unemployment data in four years and dovish comments by ECB chief Jean Claude Trichet pressed the pair ever closer to the 1.3000 level. German unemployment rose a shocking 56K against expectations of a 30K, nearly threefold greater than the month prior figure of 18K.

German unemployment rose to a much greater than forecast 56K job loss versus projections of 32K loss and the month prior results of only 18K loss. This was the second consecutive month of increase in unemployment rolls suggesting that the economic contraction in Eurozone’s largest economy is beginning to have a direct impact on the labor market. The rapid pace of deterioration in labor demand bodes badly for future economic growth in the region as consumer demand is sure to suffer further.

After having cut interest rates by 50bp this morning to 2 percent, ECB President Trichet is finally buckling down and signaling that he is ready to cut interest rates again BUT NOT UNTIL March.

The ECB lowered rates by 50bp to 2% in line with market expectations and the euro remained steady in the aftermath of the announcement as traders awaited the ECB press conference scheduled for 13:30GMT.

The EUR/USD traded on either side of 1.3200 level for most on the night in chopppy Asian and European trade as currency markets awaited the ECB interest rate decision due later today at 12:45 GMT. In a true testament to the confusion of the marketplace the estimates for ECB policy move vary from the low end of 25bp to a high of 75bp.

Tomorrow’s ECB rate announcement due 12:00GMT is shaping up to be one of the key events in the central bank’s ten year history. With Euro-zone economy facing one of the worst economic slowdowns in decades Mr. Trichet and the governing council are under enormous pressure to abandon his ”Bundesbanke-like” rhetoric and begin to ease aggressively.

The EURUSD erased almost all of its Asia session gains after a news report that Ireland may call in the IMF if the country’s economy worsens hit the wires at the start of European trade. The currency market which was steadily bidding up the EUR/USD pair in a bout of short covering ahead of Thursday’s ECB interest rate announcement was caught completely wrong footed and the unit plunged 100 points in 20 minutes on fears that such a move would create unprecedented political stress in the region.

The EUR/USD continued its descent today in early European trade coming within 20 points of the 1.3200 figure as worries over the credit downgrade of Spain and a series of EUR/JPY sales weighed on the pair for a second day in a row. The Nikkei closed down nearly 5% after Japanese investors returned from their Monday holiday and this latest wave of risk aversion kept the pressure on the euro while propping the dollar and the yen.

The euro started off the new week the same way it ended the last one – by sliding against the dollar as focus in the currency shifted towards the ECB. The central banker in Frankfurt are facing escalating pressure to lower rates in light of the severe slowdown in economic activity in the Eurozone. In contrast , Friday’s US Non Farm payrolls, though horrid at -525K, were far better than the whisper number of -700K and as a result support for the greenback stiffened as the data refused to confirm the dollar bears worst expectations.

Bank of England dropped the benchmark UK interest rate to 1.5% easing by 50bp as expected. The Monetary Policy Committee noted that the sharp drop in the pound provided additional stimulus to the UK economy tempering the need for more drastic rate cuts at the present time. The Central Bank acknowledged the severity of the UK recession stating that business and consumer confidence have declines markedly while noting that output is likely to drop sharply in the first half of 2009.

The EUR/USD gave up all of it late Asian session gains slipping below the 1.3600 figure in early European trade as news of a much sharper than expected contraction in German Trade surplus weighed on the unit. German trade surplus shrank to 10.7 Billion euros - far worse than the 14.0 Billion euro expected by the market, as exports collapsed by more than 10% in November due to massive pullback in global demand for capital goods.

The euro staged a strong rebound in early European trade this morning rising all the way above the 1.3600 handle, but news of greater than expected job losses in Germany halted the advance at that level for the time being. The rally in the pair started in Asia as bargain hunters reemerged near the 1.3500 figure attracted to the relative value in the pair after three straight days of selling. The push higher caught the shorts by surprise and EUR/USD quickly ran through the 1.3600 barrier after triggering a slew of stops.