European Central Bank President Mario Draghi said an economic recovery should begin later this year as an absence of inflation risks allows the bank to maintain record-low interest rates.

“Later in 2013, economic activity should gradually recover, supported by our accommodative policy stance,” Draghi said at a press conference in Frankfurt after policy makers kept the benchmark rate at 0.75 percent. Inflation risks are contained, allowing the ECB's policy “to remain accommodative,” and economic weakness will prevail only “in the early part” of this year, he said.

Eoin Treacy's view The taint of political corruption among Spain's ruling party and the prospect of Mr. Berlusconi's populism gaining traction in Italy has raised anxiety levels among investors fearing a return to the declines seen last year. However, while on the one hand these remain credible concerns, they need to be put in the context of how the bond markets have responded.

There has been a great deal of media attention focused on the widening of peripheral government bond spreads of late. However when we look at how much spreads have contracted and place the recent widening in that context, we are given an added sense of perspective. Spanish, Italian and Portuguese spreads found support in January and have rallied more than any time in the last few months. These can probably be considered medium-term lows but a significant deterioration in political outcomes would be required to spur additional widening. Irish and Greek spreads also found support but have not widened to the same extent.

The ECB's stance remains highly accommodative and its commitment to do what is necessary to secure the integrity of the Euro remains very much in place. Therefore even if the political situation in Spain, Italy and Portugal deteriorates further, the ECB can be expected to intervene.

The Deutsche Bank Euro Trade Weighted Index rallied impressively from July as shorts were covered amid a more positive attitude towards the Eurozone's prospects. Such a rapid appreciation has inevitably affected the competitiveness of Europe's export sector. The fact that the ECB today talked about the strength of the currency being something they are monitoring was enough for the Index to encounter resistance near 130. This area is in the region of the four-year progression of lower rally highs and a clear upward dynamic will be required to question current scope for some further downside.