The Euro has been rallying based on tough talk on inflation by the ECB. I believe this is laughable as European officials are talking about a larger bailout for indebted countries at the same time. Today, Trichet showed his hand as he said inflation pressures remain anchored and the Euro is giving back some of its recent gains.
While the ECBs stance is more credible than the Feds insistence that inflation expectations are falling, both are reluctant to tighten unless forced to. The bond and commodity markets know this and are not backing down. Rock, meet hard place.