Week in FX Europe – EURO Wallowing In No-Man Land

The EUR received only temporary support from a surprise uptick in Spanish manufacturing data early Friday. The 17-member currency hastily lost it all when other Euro-zone activity headlines began to disappoint. For now, the dollar is back in demand despite the US sequester cloud that kicks in with automatic spending cuts later today.

The overall tone in Europe's financial markets remains subdued ever since it was announced that Euro-zone banks would sharply scale back their early repayment of funds from the ECB's three-year lending operations next week. In total +EUR12.5b is to be repaid, a sharp drop from last week's +EUR62.8b. Negative news flow continues to have an impact on Euro regional funding markets.

Italy's inconclusive election result probably means another vote later this year is most likely. Investors are now worried that the Italian political situation could undermine further euro-zone economic growth and financial market confidence. Spain will get to...