There has been little net change in EUR/USD during London hours; the EUR having pulled back some ground following initial losses. The G-20 meeting brought little by way of market incentives. The communiqué did differ from the Pittsburg meeting insofar now the focus is now squarely on deficit and debt rather than on growth. That said, growth is still clearly a prime concern particularly in the US and the G-20's aim to halve budget deficits by 2013 is not aggressive by European standards.

There was no market reaction to the G-20's pledge on deficit reduction with the tone of the recent Finance Ministers meeting having prepared the market for this change of focus. On the issue of bank reform it is clear that politicians are sensitive to the need to first answer their national interests. This explains why a concerted G-20 approach to the banking sector appears to be giving way to a series of unilateral reform bills.

Generally banking sector reform looks likely to be implemented over a longer period than initially considered likely. This is a direct consequence of concerns over the impact that reform could have on growth. While the watering down of the US financial reform bill announced last Friday and of Basel III announced earlier in the week supported the banking sector, the market remains fearful that banks, particularly in Europe, will have to suffer write-down sooner or later and this is likely to keep the EUR vulnerable in the months ahead.

On the back of recent disappointments in US economic data and concerns over the degree of bad debts in Europe, investors remain reluctant to lengthen risky positions. That said stocks have moved higher in Europe this morning after a shaky start. While weak Japanese retail sales data overnight set a poor precedent for the week, European markets found encouragement in the better tone of US equities on Friday afternoon.

This coming week, however, will be an important one in terms of US data. Another poor payrolls report on Friday would heighten fears of double dip recession and encourage risk aversion. As stocks moved higher this morning, EUR/USD also pushed away from its intraday low and the CAD and the AUD found some support.

Cable has held close to the USD1.5050 level this morning in subdued conditions. The UK June Hometrack house price survey brought a modest +0.1% m/m increase; the slowest since January. Hometrack reported an increase in supply has dampening the increase in house prices, though the better tone of sterling in recent weeks may also have played a part.

Slumping consumer confidence following last week budget is also likely to impact the housing market, though mortgage rates have fallen in recent weeks in tune with the better tone in gilts and this should offer some support. Now that the initial post budget impact for sterling has worn-off, sterling could find increased incentive from EUR/USD near-term.

The new Australian PM Gillard this morning announced her new cabinet, though market reaction has been muted. The outlook for the AUD remains sensitive to the prospects for Chinese growth and overall risk aversion. Given risk that US economic data this week will remain lacklustre, AUD/USD could struggle to regain recent highs.

US personal income and spending data are due this afternoon.

Jane Foley

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