Forex focus: can the euro shrug off the latest bad news? Policy-making in Europe throughout this crisis has always been incredibly fractious but at least it had a chance of a sensible outcome with Germany at the controls. If the German captain is ordered off the bridge of the ship, then it is little wonder that markets fear Europe will rapidly run aground. In the past, the euro has managed to shrug off the most appalling bad news. But now many commentators are saying it must drift lower as areas of Europe seem bound for another credit crunch. Chris Towner of HiFX has long argued that the single currency is valued too highly. Yes the euro is still over-valued and it is only when we approach the 1.30 level in GBP/EUR that the euro starts to reach a more neutral valuation. Richard Driver of Caxton FX agrees: "The euro has been remarkably robust in the face of negative growth and growing political risks but we are confident it will eventually give way." Of course, for the pound to rise against the euro it has to display some muscle. Stephen Hughes of Currencies.co.uk says: "The pound is a fickle creature and often we see it affected more by rumour than fact. In the past we have seen the pound 'talked down" with rumours of more QE, talk about recovery taking a long time, inflation worries, unemployment, housing etc. I would expect to see this start again. The Bank of England, which hopes for an export-led recovery, has often taken the air out of our currency when it looked like improving. "If the pound was a space shuttle then the Bank of England would be a power supply failure," says Josh Ferry Woodard of TorFX. Every time sterling looks set to really take off the central bank brings it back down to earth with an interest rate cut or a further bout of quantitative easing. But Alex Lawson from Moneycorp disagrees: "Although a weaker currency would assist our export industry - an important factor in rebalancing our economy - it would also spur inflation as the cost of imported goods and raw materials would rise. As the Bank's primary goal is to keep inflation between 1pc and 3pc, and with the CPI figure running well above that level, a weaker pound would make matters worse. A major question is how the European Central Bank will react to the crisis: with an interest rate cut or more cheap borrowing for banks? "The ECB finds itself at a very tricky juncture," says Ferry Woodard. If it acts too soon it runs the risk of amplifying inflation and losing investor confidence in the currency bloc; but if it acts too late then the crisis could escalate even further and a return to growth may well become unattainable.