The Euro finished the week only marginally higher against the US Dollar, but the modest week-to-week change obscured impressive volatility through recent trading. An outright rout in the US Dollar pushed the EUR/USD to a fresh 2009 peak near the 1.5150 mark, but markets were seemingly content with keeping the pair mostly within its choppy two-month range. Forex market volatility expectations subsequently traded to their lowest levels in nearly 15 months, and we mostly expected the EUR/USD to remain contained through presumably quiet US holiday trading. A credit scare out of Dubai nonetheless shattered hopes of quiet end-of-week trading, sending the safe-haven US dollar and Japanese Yen substantially higher through Asian and European market hours. The clearly unexpected news came as a stark reminder that financial market risk sentiment remains somewhat fragile, and the week ahead could prove similarly eventful on strong economic event risk out of Europe and the US.

The European Central Bank will once again take center-stage in the highly-anticipated rate decision on Thursday, while earlier-week Euro Zone CPI and Unemployment figures could likewise prove strongly market-moving. ECB Officials will almost certainly leave the benchmark interest rate unchanged at 1.00 percent, but credit markets are on edge in expectation of staff forecasts, key lending decisions, and any rhetoric on exit plans for its aggressively accommodative monetary policy stance. The staff forecasts may prove especially pertinent to interest rate expectations, and many predict that officials will upgrade growth and inflation figures for 2010. Overnight Index Swaps currently price in a modest 84 basis points in ECB rate hikes through the coming 12 months—a considerable drop from the 100+ points priced in just several weeks ago. Suffice it to say, any especially surprising rhetoric from the ECB could move the Euro itself—especially if the bank hints that rate hikes will come sooner than later.

ECB watchers will certainly keep a close eye on earlier-week Euro Zone CPI and Unemployment figures ahead of the rate announcement, and any particularly large surprises could alter market sentiment headed into the event. Euro traders will otherwise keep a similarly attentive view of global financial market risk sentiment. The news that Dubai World—the investing arm of the Dubai Government—was effectively defaulting on its debt was a clear reminder that global credit markets remain strained. Any further signs of trouble across credit markets could cause further surges in FX market volatility, and Forex Options traders are pricing in substantial price moves in the week ahead. Suffice it to say, traders should look to control excessive FX exposure ahead of what promises to be a very eventful week of trading.

DailyFX provides forex news on the economic reports and political events that influence the forex market.