Most indicators are suggesting that risk appetite rose further this morning. European equities indices have performed well, EUR/USD is pushing higher as is AUD/USD and cable. However, the trends exhibited by the JPY and gold have been less certain. US data is patchy at best and this will likely ensure that optimism is kept in check. The recent slow crawl upwards in EUR/JPY reflects improved risk appetite but the reluctance to break above 114.20 this morning reflects doubts as to direction. Support at EUR/JPY113.00.

A decent round of German earnings this morning was complemented by another fall in the country's unemployment data. For 13 mths the German unemployment rate has dropped and while government subsidies to employers will have skewed these data, the improvement which has taken the level of unemployment back to its lowest level since Nov 2008 has now become impossible to ignore. Relief inspired by improvement in the German economy is probably contributing to the overall improvement in confidence in the European markets. Moodys this morning commented that the worst of the European debt crisis has past. These sentiments have been mirrored in the recent tightening in the yield spread of peripheral European countries. Against the backdrop EUR/USD has climbed back to the 1.3085 area ahead of technical resistance at 1.3095.

Near-term short-covering could push the EUR higher yet. Medium-term, however, investors may yet be rocked by the fact that there is still a risk that Greece may ultimately be forced to restructure its debt. Debt issues in Europe may have come off the boil but they have not evaporated, but neither have they in the US. Moodys has demanded that the US government must articulate a credible plan to tackle its bulging debt profile to protect its credit rating. Despite its gaping budget deficit, the US administration remains in favour of further fiscal stimulus in an effort to fight unemployment. This policy is possible because of the low costs of issuing and maintaining debt. Despite the large US budget and current account deficits the treasury market remains the favoured safe haven and there are no signs that it is about to relinquish this position. Demand at yesterday's 5 yr note auction was good. It is likely that US yields will push higher if risk appetite improves or if the budget repair in the US significantly lags that of other large economies. However, there are no signs yet that treasuries are losing their safe haven appeal. Given that US data remains patchy treasuries and the USD are likely to find decent support. Last night's Beige book reported that two of the Fed's 12 districts reported slowing growth. Q2 US GDP data due tomorrow will be key.

The release of UK money supply data this morning showed moderate expansion. The data follow recent comments from BoE Governor King that the recent improvement in credit conditions has come to a halt. The slow pace of growth in money supply will ensure that the BoE will keep the door to further QE open. However, with inflation well above target there is no direct threat of a reopening of this policy in the coming months. Cable climbed as high as USD1.5663 this morning as risk appetite improved. Technically the outlook remains strong with USD1.5720 now in view.

The NZD initially weakened as the RBNZ hiked rates for a second consecutive month as Governor Bollard signalled that the pace of further rate rises would be moderate. Improved risk appetite, however, lifted NZD/USD in European hours.

US initial claims are due this afternoon.

Jane Foley

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