The USD has fared a little better vs the EUR in European hours.  The move higher in EUR/USD to 1.4550 in Asia tempted USD buyers ahead of both the ECB policy meeting and the US retail sales data this afternoon.  In terms of policy, the ECB meeting is unlikely to be of much interest.  ECB President Trichet may acknowledge the economic recovery today but with the pace of growth set to be sluggish there is no pressure to change the course of policy.   While policy changes are unlikely, the market is keen to gauge the reaction from the ECB on the Greek situation, particularly given the statement from the ECB yesterday that Greek debt restructuring could hurt the market.  The Greece Finance Minister has been continuing the PR this morning reassuring the markets the Stability Pact will transform the country and reiterating his forecast that the budget deficit will fall to 3% by the end of 2012. However, market scepticism has been heightened by this week's questioning by the EU of Greece's accounting principles.  Comments from German Chancellor Merkel this morning that the EUR faces a very difficult phase refer to Eurozone budget deficits and specifically Greece.  Merkel has in the past indicated support for Greece and her references to Greece are a reminder of the political credibility invested in EMU.  While Eurozone authorities have a self-interest in doing all they can to preserve coherence in the system, uncertainty over the outlook for Greece is likely to keep the EUR on the back foot going forward.  Better than expected Nov Eurozone industrial production data (at 1.0% m/m) is a welcome relief after the indication from Germany's statistical agency yesterday implying that the recovery stalled in Q4.  But the news was unable to lend the EUR much support.  

While the USD has won back ground vs the EUR, AUD/USD is holding the majority of its gains.  Again Australian employment data was better than the printed median.  Australian Dec employment rose by 35.2K.  The possibility of another rate hike from the RBA in February is now perceived to be strong.  This view is in marked contrast to the speculation towards the end of year-end which feared a period of steady policy after the RBA's three rates rises in Q4.  As AUD/USD puts a retest of the 2009 into its sights, the NZD and the CAD have also fared better with USD/CAD retesting 1.300.  

The EUR's problems have allowed EUR/GBP to push lower in European hours.  The UK broadsheets continue to debate the issue of BoE rate hikes.  The Telegraph today questions the sense in unambiguously predicting higher rates by the end of last year but concludes that while the bank rate may rise sooner that generally thought, it probably won't rise far.  Cable has traded choppily this morning struggling with the slightly better tone of the USD.  

Comments from Japanese Fin Min Kan that he is ready to address the issue of the CNY at the Feb 5-6 G7 meeting heighten the pressure on China.  The US and France have previously been more vocal in objecting to China's USD peg but along with the Eurozone, the Japanese economy is also bearing a significant cost of Chinese exchange rate policy.  Recent steps by the PBOC to tackle inflation may indicate an increased willing to allow a revaluation in the CNY, though conventional wisdom is that China will only allow a change in policy once it is assured that external demand is sufficiently strong.  

Along with US retail sales, initial claims and business inventories are due this afternoon.  
Jane Foley
Research Director
+44 207 398 5024