The euro dropped to $1.3352 against the U.S. dollar in early trade today as Germany government officials down played the expectations of seeing a positive outcome from this week's summit meeting and created headwinds for the euro for the remainder of the week.
Analysts are excepting the European Central Bank to lower benchmark interest rate by another 25 basis points, while the Governing Council could look to carry its easing cycle into 2012 as it considers expanding nonstandard measures -- such as quantitative easing -- in its efforts at calming the turmoil in financial system
Yesterday, markets got a short-lived lift when the ECB said it is considering two-year loans for commercial banks after its three-month dollar tender surged $50.7 billion this month.
Traders are also seeing spillover as the London Interbank Offered Rate (LIBOR) for three-month dollar loans advance to 0.54000% -- the highest level since July 2009, when credit markets were still recovering from the Lehman Brothers disaster and banks refused to lend.
In the long term, traders are coping with heightened risk of a major meltdown in Europe as euro zone governments operating under the single currency become increasingly reliant on monetary support.
The longer European policy makers struggle to meet on common ground, the bigger the "shock and awe" will be need to foster a recovery.
Traders tired of being whipsawed by the headlines are becoming wise to the ECB's tactics and will be watching the wording even more closely coming out of the summit.
Definitive, concrete action items will be necessary to avoid another euro sell-off: we are proud to announce the start of our new two-year loans for commercial banks , not we are talking up more lip service of a idea on a wish list somewhere.
In the meantime, EUR/USD put in another failed attempt to push above the 20-day moving average at $1.3450 as confidence deteriorates and the currency pair continues to give back its November bounce.
Traders could see price action attempt another run for the 38.2% Fibonacci retracement.
To draw the Fibonacci lines on your charts, draw them from the 2009 high to the 2010 low at $1.3100.