In terms of direction it has been a mixed session for risk. Overnight headlines were dominated by news that China will continue to reign in speculation in the property sector. This pushed Asian stock indices lower and allowed for a better tone in the JPY and the USD. European stocks markets, however, have refused to follow suit. Good news from BP and the positive earnings from Alcoa allowed for a better tone which lent other risk assets support.

The AUD and the CAD gained ground and the USD and the JPY softened. The EUR derived additional support from the ability of the Greek government to sell EUR1.625 bln of 6 mth bills this morning. The bid/cover was a very healthy 3.64. The yield was 4.65%, lower than the 5% payable on IMF loans. This was the first time the Greek government has returned to market since it was forced to ask for bailout funds.

In all the results of the sale will come as a relief to the Greek and Eurozone authorities. While yesterday's news that Chinese demand for Spanish paper has recently strengthened is also good news for the Eurozone, the tone was marred firstly by the decision by the Greek authorities to abandon its plans to sell 12 mth paper this morning, secondly by a softer than expected reading in Germany's ZEW economic sentiment survey and more obviously by Moody's decision to downgrade Portugal's credit rating by two notches. The news on Portugal has earlier pressured EUR/USD lower, though the EUR has since recovered these losses. USD/EUR is currently little changed from last night's close.

Sterling has performed well vs both the USD and the EUR this morning. The trigger for the gains was the slightly stronger than expected UK Jun CPI data. This registered a rise of 3.2% y/y compared with median expectation of 3.1% y/y, although compared with the May data at 3.4% y/y, it continues to represents a moderation in the trend. Once again UK investors have not paid too much heed to yesterday's warning from S&P that there is still material risk that the UK could lose its AAA credit rating. Insofar as there is still a lot of ground to be covered before the UK public finances are returned to health, the S&P warning is considered by many investors as a statement of the obvious.

That said, it does turn up the pressure on the government to achieve its budgetary targets and will increase sterling's sensitively to disappointments on the fiscal front. Insofar as the EUR is likely to be vulnerable in the approach to next Friday's stress test results and given that by the end of last week sterling had given back all of its post budget gains vs the EUR, there is room for sterling to regain a little ground vs the EUR in the coming sessions.

AUD/USD has almost returned to last night's closing levels. Losses overnight were triggered by fears that monetary policy would be tightened further in China, though a better tone in risk in European hours has seen the direction of the AUD reverse. Wires have reported this morning that the Australian government will issue an updated economic forecast tomorrow which will include revenue projections from a revised and highly sensitive mining tax. Markets will be looking for signs of strength in economic projections which could feed speculation about a re-awakening of the RBA rate hike policy.

US and Canadian trade data are due this afternoon.

Jane Foley

Research Director 44 207 398 5024   FOREX and other leveraged products involve significant risk of loss and may not be suitable for everyone. is a trading name of GAIN Capital - UK Limited and is authorised and regulated by the Financial Services Authority (FSA FRN 190864)

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