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 euro remained under pressure throughout Asian and early European trade dogged by risk aversion flows and mounting concerns over the lingering economic contraction in the 16 member union while the pound continued to rally approaching the key psychological figure of 1.5000. A story in UK Telegraph noted that fully one third of European junk bond credits could default on their debt as the export driven region sees no signs of pick up in demand.

The EUR/USD regained the 1.3000 handle on early European trade after the ZEW survey of investor sentiment printed better than forecast. The ZEW for the month of March came in at -6.5 versus -12 forecast as investor sentiment improved for the fifth month in a row, The data was somewhat surprising given the dour state of conditions in EZ industrial sector, but clearly investor optimism was driven by hope that the massive fiscal and monetary stimulus put in place by most of the G10 block will soon begin to yield dividends and revive global demand.

Yen was the star performer in overnight trade gaining more than three big figures from yesterday on repatriation flows ahead of the Japanese fiscal year end. After trading as high as 99.12 just two days ago USD/JPY fell to a low of 95.67 in early European session on rumors of large bond redemptions that drove EUR/JPY lower by nearly 300 points and dragged EUR/USD down all night long.