Hawkish comments from the European Central Bank helped to prop up the single-currency on Thursday, and the rebound from 1.4052 may gather pace going into the end of the week as currency traders increase their appetite for risk. ECB board member Erkki Liikanen said inflation in the euro-area “may rise faster than expected” on the back of rising food and energy prices, but warned that the region “will continue to see sluggish economic growth in the coming years” as the governments operating under the fixed-exchange rate system take unprecedented steps to manage their public finances. Even as the region faces an uneven recovery, investors are still pricing a 100 percent chance for a 25bp rate hike next month, and see the benchmark interest rate rising by nearly 100bp over the next 12-months according to Credit Suisse overnight index swaps. As interest rate expectations gather pace, the EUR/USD should continue to retrace the decline from 2010, and the pair certainly looks poised to make a run at the November high (1.4281) as it maintains the upward trend from earlier this year. However, as the EU Summit gets underway, the heightening risk for contagion could bear down on the exchange rate, and the euro may face additional headwinds going into the end of the month as market participants speculate Portugal to share Ireland’s ill fate. In turn, European policy makers may increase their efforts to restore investor confidence, but the renewed efforts to address the sovereign debt crisis may fail to calm market jitters as the governments in the euro-area face record-high borrowing costs. As the EU Summit takes the spotlight light, the outcome of the meeting is likely to dictate price action for the single-currency over the following week, and the EUR/USD may consolidate going into April as market participants weigh the outlook for future policy. The British Pound extended the decline from the previous day as the economic docket reinforced a weakened outlook for U.K., and the sterling may continue to pare the advance from the previous week as interest rate expectations deteriorate. Retail spending in Britain slipped 0.8% in February, which exceeded forecasts for a 0.6% contraction, while sales excluding auto fuel weakened 1.0% during the same period to mark the biggest decline since January 2010. As private sector activity remains subdued, the Bank of England looks as though it will stick to its wait-and-see approach in the coming months, and the GBP/USD may continue to consolidate over the near-term as investors scale back expectations for higher borrowing costs within the first-half of 2011. In turn, the GBP/USD may continue to lose ground over the next 24 hours of trading, and the exchange rate may fall back towards 1.6000 as the pair searches for support. U.S. dollar price action was largely mixed during the overnight trade, with the USD/JPY maintaining the tight range from earlier this week, but the slew of event risk lined up for the North American session is likely to spark increased volatility across the major currencies as investors weigh the prospects for future growth. Demands for U.S. durable goods are forecasted to increase 1.2% in February following the 2.7% expansion in the previous month, while initial and continuing jobless claims are expected to weaken further in March. As the fundamental developments reinforce an improved outlook for the world’s largest economy, the data is likely to spark a bullish reaction in the greenback, but the market may show a mixed reaction to the figures as risk sentiment continues to dictate price action for the major currencies.

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