Well put here from Citi’s FX guru Steven Englander:
Investors now believe that there is no way out, other than direct ECB involvement in parallel with fiscal austerity. The logic is that austerity should be accompanied by crowding-in on the rates side — if anything, so far there is ‘negative’ crowding in. The continuation of this ‘never commit sufficiently to eliminate tail risk’ stance will keep putting downward pressure on the euro. It is still the case that euro zone policymakers are likely to prevent disaster, bur the slow policy response has made the outcomes far more costly, further eroding confidence that the tail risk is controllable. The only positive is that the set of feasible policies has narrowed, and even hawkish policymakers appear to be coming to a recognition that the euro is approaching a wall. However, the most recent developments suggest that confidence is being lost quicker than the lack of policy alternatives is being recognised, so the euro is likely to remain under pressure and on the brink. EUR upside remains on a firm commitment to resolving the crisis (and there is still a convergence trade that will potentially emerge) but right now the visibility remains on the downside, rather than upside.