For the second day in a row the data from the Euro-zone produced disappointing results as January PMI Manufacturing surveys printed at 53.5 against expectations of 54 and try hard as they may, euro longs could not keep the pair afloat as EUR/USD unwound most of yesterday's pre-FOMC gains and returned to the 1.2100 level by midday European session. Taken together with yesterday's weak German retail numbers and higher unemployment data the news from the Euro-zone suggests that the region's economic recovery continues but remains precarious.

This may create an interesting dynamic tomorrow as Mr. Trichet holds a press conference after the monthly ECB meeting. The market expects the European Central Bank to stay put at 2.25% but to provide hawkish guidance for the March meeting.  The latest economic data is likely to exert strong political pressure on Mr. Trichet to hold off on a March hike by various EZ finance ministers gravely concerned about the unemployment situation in their respective countries. Any monetary move that could trigger even a remote possibility of a slowdown in Euro-zone will be strongly resisted  by most politicians in the region. Therefore rather than focusing on Mr. Trichet's words traders may pay attention to the tone of the message to determine if Mr. Trichet may be swayed by political considerations.

If the ECB does in fact hint at  the possibility of keeping rates at 2.25%, the euro is quite likely to see further weakness and may test the 1.1950 support zone once again as interest rate differentials return once more as a theme to the FX market.

Boris Schlossberg is a Senior Currency Strategist at FXCM.