There is nothing more dangerous in financial markets than governments and central banks playing for time as markets ruthlessly exploit underlying weakness. Although position adjustment remains a powerful short-term force, the euro is ultimately in a no-win situation. If the ECB can push ahead with plans to launch its aggressive bond buying programme with a cut in interest rates, there will be an improvement in risk appetite, but this will not support the euro as it will increasingly be used as a global funding currency.
If the German Bundesbank and Spanish government decide not to co-operate and look to derail the fledgling plan for intervention, then the euro-zone crisis will erupt with even greater venom which, initially at least, will put the euro under strong selling pressure. As has been the case throughout 2012, the euro remains a strong sell on rallies.
The ECB has laid out its possible plan for euro-zone salvation through aggressive bond buying, but the framework necessary for such intervention is not in place. There will, therefore, be a potentially dangerous vacuum in the very short term as Europe continues the painfully slow process of rearranging the pieces on the chessboard.
The Bundesbank has been notable in its deafening silence since Draghi's press conference last Thursday. The central bank is of course extremely uneasy over the implications of renewed bond buying and the silence speaks volumes. Bundesbank head Weidmann was a key economic advisor to Chancellor Merkel and this relationship remains a pivotal factor for the euro's future. If Weidmann chooses to stay on board, the implications are that Merkel has cast aside serious reservations and will launch a major offensive to preserve the euro. If the central bank chief resigns, the euro-zone crisis will enter a new and probably terminal phase.
The Spanish situation will also be watched extremely closely during the forthcoming week. Spain will be under intense pressure to bow to Euro elite demands and apply for an EFSF bailout. This will be the key trigger for the ECB to unleash its quantitative easing. Prime Minister Rajoy is looking to play for time and assess the conditions for aid as he looks very nervously at the domestic political implications of applying for a rescue. There is no real possibility that he would survive such a situation and there is an increasingly important risk that Spain as a whole has moved beyond the point of no return as the cost of continuing euro-zone membership outweigh benefits.
Greece has almost been forgotten as the crisis has swirled around Spain, but the Greek government is likely to run out of cash in two weeks time on August 20th with creditors very reluctant to extend additional funding and tensions will inevitably increase ahead of this deadline.
The most likely outcome is ultimately for a slimmed-down euro area to survive with Greece and Spain ultimately deciding against continuing membership.
Both major US data releases are due on Thursday with the latest trade data and jobless claims due for release. The overall impact is likely to be limited, although the trade data will be important to assess underlying trade volumes and the extent of global vulnerability during the second quarter.
Comments from Fed officials will inevitably be watched closely, although September is likely to be the pivotal month in terms of Fed policy.
The UK manufacturing data will be watched closely on Tuesday with the holidays set to trigger a sharp monthly decline. The Bank of England inflation report is will be more influential on Wednesday and is likely to be compelling reading as the bank attempts to counter domestic vulnerability, falling money supply growth and collapsing euro-zone demand.
The Australian Reserve Bank will announce its latest monetary policy decision on Tuesday and there looks to be little reason for the bank to take any additional action at this stage. There will certainly be unease over the regional outlook, but the RBA can comfortably afford to wait and assess developments.
The Bank of Japan will face pressure for further action at Thursday's policy meeting. There will inevitably be a major sense of frustration within the bank and Finance Ministry. It is proving extremely difficult to ease deflation within the economy and the bank's best efforts to prevent yen appreciation are being thwarted by global policy action as all central banks stamp on the monetary accelerator.
The Chinese inflation data on Thursday will be important as a sharp decline in inflation for July could certainly trigger a fresh cut in reserve requirements by the PBOC. China's trade data will also be important for global market sentiment on Friday and a sharp decline in trade volumes would undermine risk appetite as well as increasing the mood of unease within the Chinese government.