EUR/USD bravely attempted to claw back some of yesterday’s losses in Asian hours. However, sellers dumped the euro during the European session as economic data reminded the market that this year’s fiscal and debt issues in the Economic & Monetary Union have not evaporated.

While most eyes were focused on the Federal Reserve (Fed) at the start of this week, the situation in the European periphery took a turn for the worse.

Attention yesterday was focused on Ireland with the bond spreads versus Bunds blowing out on fears about the mounting costs of the bailout of Anglo Irish Bank. The spreads have improved a little today as the Bank of Ireland dismissed the movement in bond markets as spasms. That said, the focus on Ireland had heightened market nervousness sufficiently for the euro to take a heavy hit this morning on the release of worse than expected June - 0.1 per cent month-on-month - industrial production data and on poor Greece GDP data.

The Greek economy shrank by 1.5 per cent quarter-on-quarter in the second quarter, this being the seventh consecutive quarter of contraction. Even though the budget figures from the government have improved this year quicker than most had been expecting it is an arithmetic certainty that with no growth Greek debt will continue to rise until the budget deficit is completely eradicated.

The European Union has forecast that Greek debt would rise to 133.9 per cent of GDP in 2011 from 124.9 per cent in 2010. Today’s worse than expected GDP data gives credence to forecasts that the debt could expand to 150 per cent of GDP. In turn there is still a tangible risk that Greece could be forced into announcing some kind of debt default. If the European Central Bank (ECB) continues to reign in liquidity provision, this risk may be increased.  While the German economic recovery has recently surpassed market expectations, the ECB clearly has a difficult path to tread.

While Eurozone debt issues will almost certainly come back to haunt the EUR again, it is unclear whether this week’s news from Ireland will spark a renaissance of the Eurozone fiscal concerns.  German Q2 GDP is due tomorrow and strong data here could prompt some buying in the EUR.  Technical support lies around the €/$ 1.2600 level suggesting that while €/$ holds above the uptrend in €/$ has not yet given up the ghost.

$/Yen rose in early European hours this morning as the market became wary about intervention ahead of a Japanese Ministry of Finance press conference. In the event there was no real news and $/Yen fell back towards closing levels. The usual remarks that the Ministry of Finance is watching FX markets will soon be seen by the market as little more than an empty threat. Comments from the Japanese finance minister Yoshihiko Noda Noda that excessive currency moves are harmful to the economy are not only a statement of plain fact but do not raise the risk of intervention at all. The ECB has concluded that intervention may actually be a cause of FX volatility, this factor is one of many that is likely to keep the Ministry of Finance from intervening yet.

The dollar's recovery has pushed cable back towards $1.5580 this morning, though sterling is holding its own against the euro trading close to 0.8220.  The Bank of England may have darkened the mood in the UK yesterday but budget data remain a prime focus for the sterling markets and next’s week Public Sector Net Cash Requirement (budget deficit) data will be a prime domestic market focus, better GDP in the second quarter and the  previous set of terrible data suggest some scope for an improvement.