FX Market Overview

Despite the disappointment at the Ecofin meeting and the Greek PSI negotiations which are still ongoing risk sentiment was markedly improved yesterday with EUR/USD breaching $1.3000. Markets ignored news articles discussing the need for a further Portuguese bailout which is gathering more momentum and instead took their cue from the fact that the French and German debt auctions went well yesterday with decent demand seen from both.
Whilst Berlin has been unflinching in its efforts to increase fiscal discipline in the Euro zone to avoid throwing more money at the European debt crisis, comments from a member of the German parliament suggesting Germany are considering the option of running the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) alongside each other and, perhaps increase the size of the packages to €750 Billion, has helped to give risk appetite a lift. German Bunds moved into negative territory and the Euro rallied pushing Sterling/Euro down to €1.1930. Any loosening in policy from Germany will of course have consequences and my guess would be that governments would have to sign up for tighter scrutiny and harsher penalties should they break the rules regarding budget deficits and public debt.
It was not all good news though as there appears to be a high risk standoff between Greece’s private sector creditors and Eurozone governments over the size of any potential haircut. Finance ministers rejected the latest proposals and this should weigh heavily on the Euro in the short term.
In the UK this morning the International Labour organisation ( ILO) has reported that the UK risks falling back into recession as the global jobs crisis continues unabated and economic activity decelerates across the Eurozone. This significantly increases the risks of a double dip recession and they have called for urgent action to create more jobs as UK unemployment has already hit 8.4%. This has done nothing to improve the fortunes of the Pound which has struggled to hold on to any gains recently particularly as Adam Posen has again stated that the UK's Monetary Policy Committee (MPC) is right to consider further quantitative easing and that in fact the MPC can step up Quantitative Easing “without limit” as inflation fears begin to wane. Tomorrow’s Bank of England minutes will be watched very closely for any further clues to future monetary policy direction and it is unlikely the Pound will make significant gains before then.
This week is also a week for central bank interest rate decisions with announcements from the Bank of Japan, they kept rates on hold at 0.1% this morning, US Federal Reserve tomorrow at 7.15pm GMT and the Reserve Bank of New Zealand at 8pm GMT. Whilst both central banks are not expected to alter rates from their current levels at 0.25% and 2.50% respectively, it does leave the door open for volatility leading up to the event.
Today’s focus will be in Europe with the start of the World Economic Forum in Davos and manufacturing data from France and Germany due this morning. The Purchasing Manager's Indices from the Eurozone’s two largest economies are expected to make for gloomy reading and will give investors an insight into how deep the recession in the Eurozone is likely to be. In a similar vein, Industrial orders from the Eurozone will also be closely watched later this morning in a day devoid of tier 1 data. Have a good day.