A typically quiet, meandering start to the week in the FX markets with price action seemingly as groggy as some of the dealers suffering from Monday morning blues. After having dropped 100 points on Friday in a pure vacuum of economic news, the EUR/USD spent most of the eartly European session tonight consolidating around the 1.1950 level as traders searched for any meaningful theme. There was enourmous amount of speculation as to Friday's sudden drop in the euro, but perhaps the best explanation was the simplest. After making hawkish noises all week long ECB officials, namely Mr. Gonzales-Paramo who is a voting member, completely contradicted the messages Mr. Issing and Mr. Trichet by offering a far more dovidh stance on the possibility of any near term ECB rate hikes.  The markets did not have to be told twice, as speculators rushed to dump euros on the assumption that the interest rate differentials in EUR/USD pair will continue to widen into next year. With euro now lagging the dollar by 175 basis points the ECB must begin to close the interest rate differential if the euro is to have any meaningful chance to rally. But with the state of Euro-zone recovery still tremendously fragile, European monetary authorities are very cautious in their policy posture for fear of stifling what little growth there is.

Latest European data however, has been supportive of a more hawkish bias, as both French Production Outlook and EZ Industrial New Orders registerd materially higher readings with the former printing -2 against expectation of -13 and the latter reporting an impressive year over increase of 7.5%. Still, though it is tempting to argue for a euro long as fundamentals show improvement, given the recent price action in the pair we believe that no one should play hero until EUR/USD can clear and convincingly hold the psychologically important 1.2000 barrier. Otherwise, the positive momentum of the dollar bulls could easily carry the pair to yearly lows especially if the market perceives underlying strength in the US economy to be unaffected by latest storms both natural and man made brewing in Florida and Washington DC.

Boris Schlossberg is a Senior Currency Strategist at FXCM.