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Although investors are still fearful over the European debt crisis, these concerns have declined in recent weeks thanks to large austerity measures across the continent which have helped to soothe investor fears over sovereign default risks. Due to these bold measures it appears as if the region will avoid a default, at least for the time being. However, this fiscal restraint has had an unintended consequence, it has greatly increased the value of the euro over the past few weeks to levels unseen since earlier this year before the crisis began.

These higher euro values may douse the flames of recovery as higher export prices choke off growth in these struggling economies and threaten to plunge the region back into recession. The situation has not been helped by recent weakness in other major developed markets such as Japan and the U.S. which have already begun– or seem on the verge of– expanding their quantitative easing measures in a global central bank race to weaken local currencies in order to maintain export competitiveness and keep recovery hopes alive.

These recent trends look to be put under the microscope due to the European Central Bank meeting later today in Germany. While rates seem very likely to remain at 1.00% and a bond-buying program seems unlikely, many investors anticipate that ECB head Jean-Claude Trichet will do his best to talk down the euro. “We suspect that Trichet will subtly hint that the European authorities would not be happy with taking the lions’ share of the dollar adjustment in the foreign exchange market,” said Derek Halpenny, European head of global currency research at the Bank of Tokyo-Mitsubishi UFJ. If this happens, look for modest weakness in the euro which could help to boost markets from Paris to Milan.

Meanwhile, in Great Britain where the country’s central bank meets as well, many analysts believe that the Bank will likely start up its quantitative easing program in the near future in order to try to boost the economy from its current sluggish state. The UK is also suffering due to the weight of its debt and its attempts to balance growth with deficit concerns but it has less monetary tools that it can still use to attempt to boost the economy than those available in Frankfurt. Unlike the rest of Europe, there are significant inflation concerns building in Britain so any further easing measures are likely to be small or met with increased scrutiny; CPI hit 3.1% and was well above the bank’s target rate of 2.0% in August. “Signs that the economic recovery is fading have prompted the MPC to move slightly closer to providing the economy with more stimulus,” said economist Vicky Redwood at Capital Economics in London. “For now, the resilience of inflation will probably mean policy is left on hold. But we continue to think that more quantitative easing is likely at the end of this year or the start of 2011.” Due to these concerns, look for British stocks to remain in focus along with their continental counterparts in Thursday trading.

One ETF in particular that looks to be heavily impacted by today’s events is the Vanguard European ETF (NYSEARCA:VGK). The fund tracks the MSCI Europe Index which is made up of common stocks of companies located in 16 European countries. The countries with the largest capitalization weightings in the index are the United Kingdom, France, Switzerland, and Germany; others represented are Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden.

Due to this pan-European focus, the fund looks to be in focus more than most European ETFs which merely target the euro zone and leave out peripheral nations which still maintain their own currencies such as the United Kingdom. The fund holds 479 companies in total with a diverse mix of sectors. Financials take the top spot with 22% of the fund’s total assets and are closely trailed by consumer goods (16.2%), and industrial materials (14.9%). As fears over the European crisis have eased in recent weeks the fund has soared; it is up almost 20.9% over the past 13 weeks and 11% in the last month. However, these recent gains could be called into question after today’s important meetings; should either the ECB in Frankfurt or the BOE in London announce new stimulus plans or talk down their currencies, look for VGK to be a big mover in today’s trading.

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Disclosure: No positions at time of writing.

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Source: Thursday's ETF to Watch: Vanguard European