London AM Session, Jan 18 2010
For the first time since September last year EUR/GBP has broken below the 0.880 level.   The release of Rightmove's January house price index (+0.4% m/m) supported the view that the UK's important property market remains in recovery mode, but the move in EUR/GBP has more to do with the situation in Greece than it does UK fundamentals.  European Finance Minister will today meet to discuss Greece budget deficit.  Last week's criticism from the EU that Greece's accounting principles were flawed is likely to be restated and possibly changes to Greece's Stability Pact will be demanded.   Speculation that Greece may be forced to exit EMU appears to be demanded increasing attention largely because there is wide scale doubt on the ability of Greece to achieve the necessary austerity without triggering large scale social unrest.  For now, however, it seems unlikely that EMU officials would risk the credibility of the entire system by opting to force Greece out.  However, the patience of the lower budget deficit countries promises to be sorely tested and this is likely to create talk about if and how adjustments to the system could be maintained.   Although there is a risk that the release of the UK public sector deficit data later in the week will be a reminder of sterling's own poor fundamental backdrop, the ability of EUR/GBP to hold below the 200 day sma at 0.8840 suggests sterling is on course for a move towards 0.8700.  Cable has hit a one month high at 1.6376 this morning; a close above 1.6350 would strengthen the technical outlook.  A corrective bounce in EUR/USD at the 1.4330 level this morning ran out of steam ahead of 1.4400. 

The BBK's monthly report this morning highlighted that Germany's expansion significantly slowed in Q4.  This is in line with the implications from Germany's statistical agency last week and will not help the outlook for the EUR.   Q4 data will officially be released on Feb 12. 

This month's poor US retail sales and payrolls data in addition to the tightening in Chinese monetary policy has caused the market to re-evaluate its view on risk.  AUD/JPY has pulled back from the month's high in reflection of the more sombre mood, though the AUD is still supported by the perception that the RBA will hike rates again on Feb 2.  While Australian fundamentals remain relatively solid, the AUD may be susceptible about fears that expectations for Chinese growth may be reined in.  The outlook for the JPY continues to find support as risk is taken off the table.   USD/JPY remains confined to range trading below the 91.00 level. 

More evidence of normality in monetary policy operations came this morning with the announcement from the ECB that it would end one week CHF swaps after Jan 31.  The SNB will halt swaps with the Polish and Hungarian central banks by Jan 25.

US markets are closed for a holiday. 

Jane Foley
Research Director
+44 207 398 5024