Markets, while slightly risk positive, are trading with a cautious energy and are lacking real directional momentum. We continue to suspect that FX will be languishing in trading limbo for the foreseeable future until we get more negative (or positive) news out of the Eurozone. News flow over the weekend was light which allowed risky assets to maintain their mild rally in Asia. EU Commissioner Rehn stated that the gossip on Spain debating whether or not to access the EU's stabilization fund, was completed unfounded. He went on to mention that Spain was enacting significant austerity measures which should benefit their fiscal position near term. Elsewhere, ECB Governing Council Member Orphanides said it was bizarre to even contemplate the probability of a potential Greek default. The activation of the EU/IMF stability fund by Greece has lead to stabilization and even tightening of peripheral / German yield spreads, however the EU is far from being out of the woods just yet. Short term Greece debt yields are still some of the highest in the world and there is growing evidence that deposits are rapidly leaving Greek banks. We suspect that traders are being lulled into a false sense of security (with a majority of events scheduled for later in the week) and real upside in the EUR should be capped.
Tomorrows UK CPI will capture the markets attention. Prior readings at 3.7% was well above the MPC 2.0% target and while most analysts expect a slight drop in data, inflation will still be well above the BoE comfort level. We believe there are upside risks to the reading which will put the MPC in a very uncomfortable position of having to contemplate tightening. However, should inflation drop significantly, the fiscal tightening proposed by the new government could cause the BoE to resume their QE program.