The euro risks ceding all of its post-European Union summit gains as euro zone economic data takes a turn for the worse and a European Central Bank (ECB) interest rate cut looks more likely.
Orders to sell euros on Monday at $1.2700-20, just above the high of $1.2693 set after Friday's EU summit, were never filled and are said to have been lowered to $1.2630-40. That is nearly half a US cent above current exchange rates.
Even if the euro manages to rise that far, traders will have to take into account the chance that the ECB will cut interest rates on Thursday or signal some other form of monetary easing.
That could lead to an eventual re-test of last week's low of $1.2405.
The risk of the euro backsliding before the ECB meeting is all the greater given liquidity will be lower than normal in the European afternoon on July 4 because of the US Independence Day public holiday.
Swings in the euro's exchange rate may therefore be exaggerated the day before the ECB is expected to cut its benchmark refinancing rate to a new record low of 0.75 percent, according to a Reuters poll.
That sounding was taken even before purchasing managers' data on Monday highlighted the fragile state of the euro zone economy and further bolstered the chance of an ECB rate cut.
These figures showed euro zone manufacturing was hit hard in June, factories were preparing for worse ahead, and jobs were being cut at their fastest rate in two-and-a-half years.
An economically fragile euro zone does not need a strengthening currency that erodes its exporters' competitive advantage in global markets.
The debate over US central bank policy could also end up undermining the euro against the dollar.
Speculation that weak US economic data might lead the Federal Reserve to consider a third round of asset purchases has been strong enough to buoy US equity markets in recent days.
But Fed officials seem to wish to see how the data evolves.
Even New York Fed President William Dudley, who has a reputation of being a policy dove, said on Friday that he wanted more information to give him a clearer view of the health of the US economy.
If the Fed takes a while to ease policy again, any ECB rate cut might reduce demand for euros as the interest rate differential between the euro zone and the United States will shrink.
Those who have been betting the euro would extend its post-summit gains might also be prompted to rethink their strategy as investors and traders reassess the outcome of that meeting.
What was presented by some as a victory of the leaders of Italy, Spain and France over German Chancellor Angela Merkel is starting to be viewed as less clear cut.
Finland said on Monday it would block the euro zone's permanent bailout fund from buying government bonds in the open market while the Netherlands said it did not support using the fund to buy bonds in this way.
Germany's compromises on short-term crisis-fighting should not mask what it got in return — notably agreement to establish a central supervision authority for banks run by the ECB.
While the details have yet to be hammered out, it will necessarily entail some loss of sovereignty for members of the currency bloc, and may yet generate a political backlash.
Even the 120 billion euro "growth pact", which was portrayed as a victory for French President Francois Hollande, was arguably more symbolic than substantive given much of the money comes from already pledged, but unused, EU structural funds.
What was agreed at Friday's EU summit was not an unequivocal positive for the euro and recognition of this will lessen the allure of holding the euro at the higher end of recent ranges.
Post-EU summit demand for euros has already faltered and should reverse in the face of the cold chill of economic reality and the impending ECB rate decision.