Early comments from the ECB’s Stark that the rest of the EU will not rescue Greece if its fiscal position worsens chased the EUR significantly lower just ahead of the European open. EUR/USD hit a low of 1.4290 before buyers leapt in to support the EUR. Not only have comments like those from Stark been heard before but they are in contrast to the sentiments offered by other EMU officials over the last month. While the ECB can always be relied upon to support the theme of fiscal prudence, the political will embedded within EMU means that there is no realistic expectation the Eurozone officials are presently prepared to undermine the cohesion of EMU but allowing a peripheral country to fail to meet its debt commitments. Thus, while the market remains very sceptical on the Greek government’s ability to cut the budget deficit to below 3% of GDP by 2012, there is an underlining assumption in the market that Greece would be supported if it became necessary. Thus, while this morning’s price action confirms that the EUR is vulnerable to bad news regarding EMU, a wholesale sell-off in the EUR is likely to be checked by the ongoing belief that cracks within EU will continue to ‘papered over’.

Cable pushed higher early on in tune with the recovery in EUR/USD but the upside ran out of steam and the pound is finding it difficult to hold above the 1.6000 level. According to the Nationwide, UK consumer confidence fell in December by the most in a year. This report coincides with this week’s warning from two key UK retailers M&S and Next that 2010 could be a tough year. Higher VAT, the reining in of fiscal incentives and the likelihood that growth in 2010 will be subdued appears to be bearing down on consumers. The positive 2.68 bid cover on the GBP 4000 mln gilts auction is a ray of good news following Pimco’s warnings that UK’s credit rating could be adjusted lower if the Labour party won the election. But, in light of the fiscal worries and the forthcoming general election it could be a gruelling few months for the pound. Dec PMI services was in line with expectations at 56.8, while it strengthens the notion that growth returned to the UK economy in the last quarter it had little impact.

News that the Japanese government have named Deputy PM Naoto Kan as the New Finance Minister should reassure investors, but the news had little impact.

AUD/USD pushed higher in Asian hours on the better than expected 5.9% m/m rise in building approvals. The Stark news caused a rapid recovery in the USD in early London hours but the AUD retraced its gains later in the session.

This afternoon, US Dec ADP employment data will be keenly watched. US non-manufacturing ISM and the FOMC minutes are also due.