The escalating debt crisis and emerging banking concerns weighed heavily on the Euro last week as borrowing costs in vulnerable Italy and Spain surged while the possibility of a Greek exit from the bloc remained on investors’ minds. Italy was forced to pay a yield of more than 6 percent on 10-year debt for the first time since January while the Spanish equivalent neared the 7 percent level which prompted Ireland and Greece to seek bailouts. Economic conditions also continue to deteriorate as a report showed that unemployment remained at a record high in April. As trades closed, the single currency fell 293 pips to the Japanese yen and 157 pips to the US dollar. Likewise, the British pound dropped heavily after the Manufacturing PMI fell to a three-year low in May and the British Chambers of Commerce predicted that the UK will barely expand this year. The Sterling gave up 455 pips to the Yen and 311 pips to the Greenback. European debt fears also dragged the Swiss franc lower as it dipped 231 pips opposite the Yen. Nonetheless, a strong GDP report helped the Swissie gain past the Australian dollar by 29 pips.

This week, developments in the Euro Zone debt crisis will likely continue to influence the European currencies, particularly the Euro. Germany’s Welt am Sonntag newspaper reported over the weekend that European Union officials are beginning talks on an initiative to advance the EU to a new level of banking, fiscal and political union. Such matter was advanced by leaders of Italy and Spain over the weekend. Italian Prime Minister Mario Monti called for using Euro bonds to create a faster path to common debt while Spain’s Mariano Rajoy floated the idea of a common fiscal authority in Europe to synchronize budgets and manage debts. However, such ideas would likely meet tough opposition from Germany. Chancellor Angela Merkel has stated that she would under no circumstances agree to jointly issued debt. On the matter of closer political and banking union, Merkel stated that the continent will have to face a debate soon.

A bearish outlook for the Euro is believed to be enhanced today as the Sentix Investor Confidence report is apt to underscore increasing pessimism among investors over prospects in the Euro Zone. The index is estimated to decline from -24.5 points to -29.1 points this month, its lowest reading since July 2009. Concerns over the banking system, as well as the lack of a clear path to resolution, are presumed to continue weakening investment prospects and the overall economy as well. Tomorrow, another batch of bleak economic data is in store from the Euro region. Despite gains in France and Germany, Retail Sales for the whole bloc is presumed to have declined by 0.1 percent in April, reversing the 0.3 percent incline recorded in March. Meanwhile, powerhouse Germany is also feeling the pinch as the German Factory Orders is believed to have dropped by 0.9 percent in April from a 2.2 percent gain recorded in March, suggesting that production is apt to deteriorate in the coming months. With such reports underscoring views of a deep recession, the Euro is deemed to weaken.

A key event for the Euro is deemed to occur on Wednesday when the European Central Bank convenes for its monthly policy meeting. Although the central bank is widely believed to keep rates unchanged at 1.0 percent this month, attention will likely be placed on the accompanying statement to gauge the future policy moves of the ECB. The ECB is also awaited to publish its latest quarterly forecasts on inflation and economic growth. A somber assessment is presumed to weaken the single currency. Meanwhile, the UK releases its first indicator for the week with its Construction PMI report for May. In line with views that the British economy is deteriorating, the gauge of construction activity is foreseen to dip from 55.7 points to 54.8 points.

Thursday marks a vital session for the British pound as the Bank of England’s Monetary Policy Committee takes its turn to convene regarding monetary policy. Likewise, the BOE is widely anticipated to keep policy unchanged, but expect the markets to speculate on the vote tally for the Asset Purchase Facility as some members have expressed the possibility of increasing the size of stimulus. The Services PMI is also presumed to weigh on the Sterling as the index is projected from 53.3 points to a grade of 52.7 in May, its lowest level in 6 months. On the other hand, the Swiss franc is deemed to be influenced by the release of labor and inflation data. The Unemployment Rate is projected to edge up from 3.1 percent to 3.2 percent, its highest reading since March last year, in a sign that the debt woes in the Euro Zone are beginning to affect the Alpine nation. Price pressures also remain subdued as the Consumer Price Index is seen to have risen by only 0.1 percent in April.

The Euro is foreseen to end the week on a somber note as the Italian economy continues to falter. The Italian Industrial Production is estimated to have declined by 0.4 percent in April from the 0.5 percent increase seen in the previous month, highlighting the economic strains imposed by the debt crisis. Meanwhile, a weaker British pound is also expected on Friday as the Producer Price Index Input is projected to have dipped for the second straight month in April. The PPI-Input is estimated with a 1.2 percent drop during the month to follow the 1.5 percent decline registered in March. Lower inflationary pressures suggest that the BOE has more room to implement further easing if necessary.