The Euro fell back from a high of 1.3045 on Wednesday and fears surrounding the sovereign debt crisis is likely to push the single-currency lower throughout the day as European policy makers fail to restore investor confidence. Portugal auctioned EUR 599M of debt due in 2020 yielding 6.716%, which compares with the 6.806% that was offered back in November, while Italy and Spain are scheduled to tap the bond market tomorrow as the regions struggles to manage its public finances. In response, Portugal Finance Minister Fernando Teixeira dos Santos said the auction was “a relative success,” and went onto say that the country will not need external aid while talking to the media in Lisbon. Meanwhile, a report by Bloomberg News said that the EU is considering additional measures to curb the risk for contagion, which include a bailout package for Portugal, a bond buyback program, as well as lower interest payments on the emergency lending programs, but the lackadaisical approach taken on by European policy makers may fail to restore investor confidence as market participants speculate Spain and Portugal to share Ireland’s ill fate. In turn, the European Central Bank is widely expected to hold the benchmark interest rate at 1.00% tomorrow, and the central bank could be forced to delay its exit strategy further as the region faces an uneven recovery. ECB President Jean-Claude Trichet will certainly make an attempt to talk down the risk for the region as he expects the rebound in economic activity to gradually gather pace this year, but the comments from the central bank head may fail to prop up the single-currency as investors see the debt crisis spreading throughout the region. As the near-term rally in the EUR/USD stalls just shy of the 200-Day moving average at 1.3069, the exchange rate may continue to consolidate over the next 24 hours of trading, and the single-currency is likely to face increased volatility going into Thursday as investors weigh the outlook for future policy. The British Pound pared the overnight rally to 1.5679, and the GBP/USD may hold steady throughout the day as the Bank of England is scheduled to announce its interest rate decision tomorrow at 12:00 GMT. The BoE is widely expected to hold the benchmark interest rate at 0.50% while maintaining its asset purchase target at GBP 200B, but the central bank may refrain from releasing a policy statement as it maintains a neutral outlook for future policy. As market participants scale back speculation for additional monetary easing, the rate decision could still produce a bullish reaction in the GBP/USD even as the MPC retains its wait-and-see approach, and the pound-dollar may continue to retrace the decline from the previous month as market participants speculate the BoE to gradually normalize monetary later this year. In turn, we may see the GBP/USD clear the 100-Day SMA (1.5714) tomorrow, which would expose the December high at 1.5910. The greenback lost ground against most of its major counterparts on Wednesday, with the USD/CAD slipping to the lowest level since May 2008, and the U.S. dollar is likely to face increased volatility later today as the Fed’s Beige Book is scheduled to cross the wires at 19:00 GMT. The Federal Reserve is likely to maintain a cautious tone for the world’s largest economy given the ongoing slack within the private sector, but the central bank may hold an improved outlook for future growth as businesses continue to increase their rate of production. In addition, we expect the Fed to maintain a dovish bias for monetary policy as it expects inflation to remain subdued for some time, and comments from the central bank could bear down on risk sentiment as U.S. policy makers cast doubts for a sustainable recovery.

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