German Chancellor Angela Merkel’s meeting with Italian Prime Minister Mario Monti sent EUR/USD to an overnight high of 1.2733, as the market welcomed Italy's steps to fiscal consolidation.

However, the currency pair quickly fell to a 16-month low of 1.2662 in anticipation of tomorrow’s ECB meeting. Fitch analyst David Riley has warned of a 'cataclysmic' collapse of the euro if the ECB fails to increase its purchases via the Securities Markets Programme, while Andrew Wilkinson of Miller Tabak & Co. has said that, 'the market will probably be disappointed tomorrow in terms of what the ECB will do with buying bonds or lowering the interest rates, and that may weigh on the euro.' Having lowered interest rates to just 1% in December, the consensus is to keep them on hold for the time being, with only 6 of 53 ECB members calling for a rate cut. With credit markets suggesting zero probability of a rate cut, no cut may result in a modest downside, while a surprise cut could lead to a sharp move down to support at 1.2666, a move below which would open the key support of 1.2588.

Resistance is at yesterday’s high of 1.2818. The upcoming European and US sessions are expected to be busy, with the ECB meeting taking place and US retail sales and jobless claims numbers to be released.