Just in case you thought it was safe to tiptoe back into the euro, think again.
That's the word from Valentin Marinov, a currency strategist at Citigroup.
Marinov says a disappointing report on industrial production from Germany, along with downbeat comments from officials there, point to tough sledding ahead for the euro zone's largest economy. And Germany is only the latest country to report economic activity below expectations.
"The latest Eurozone data releases will keep the cyclical headwinds for EUR firmly in place ahead of the regular ECB meeting," Marinov wrote in a note to clients.
That doesn't mean the euro is headed directly south, though.
Marinov expects no surprises from the European Central Bank on Thursday, and "usually, unchanged policy stance tends to support EUR by boosting its rate advantage especially against other low yielding currencies," he says. "We suspect that tomorrow's meeting need not be an exception."
But once investors pass that point, Marinov is more bearish.
"With the labor market data out of the Eurozone continuing to weaken, concerns about the German economy growing and credit crunch worsening, inaction tomorrow could be seen as an indication that the ECB may be falling behind the curve," he says. "This could mean that EUR need not enjoy a sustained bounce following the meeting. A surprise rate cut could make the euro even more attractive funding currency and it can extend its downside against G10 smalls."
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