Financial markets are bracing for the pessimistic view that the lingering European sovereign debt crisis, which has now entered its third year, is likely to bring recession to Europe.

This bearish view has contributed to analyst forecasts of the EUR/USD falling as low as 1.15 levels. This compares with Citibank's forecast of potentially reaching 1.20 in the next 6-12 month period.

In fact, the EUR/USD reached a recent low of 1.2620 in January but managed to rebound sharply to as high as 1.3234 within a two-week period. This was supported by massive European Central Bank (ECB) liquidity helping to alleviate pressure on bank funding as well as encouraging European banks to purchase short-term European government bonds. It was also buoyed by expectations that Greek government and private sector investors would reach an agreement regarding the voluntary exchange on the bond swap in February. However, the EURUSD is still a currency to sell on rally at the moment as the sovereign debt crisis is far from over.

Citibank economists expect the ECB to lower its benchmark interest rates in 2012 to 0.5% down from the current 1.0%. New ECB President Mario Draghi has already reversed former President Jean-Claude Trichet's 0.5% rate hike in 2011 amid the lingering debt crisis, and a forward looking interest rate cut scenario by the ECB would contribute to a weakening bias for the EURUSD going forward.

Investors should monitor a second ECB 3-year liquidity facility on 28 February as another massive liquidity operation may continue to provide positive sentiment towards the Euro-zone.