After taking a battering this week risky assets are getting a little respite today. Stocks are higher, the Swissie and yen are off their highs and the dollar index is finding support at 77. Meanwhile the euro and the pound are still being driven by rate expectations. This is benefiting the euro - EURUSD is up above 1.3800, while the pound remains under pressure after a fairly lacklustre week.

The Eonia rate (the interest rate charged for 3-month euro swaps), which moves closely with interest rate expectations is back at recent highs as we lead up to next week's ECB meeting on Thursday when we will hear from Trichet directly. At this stage the risk is that he won't be as hawkish as the market expects weighing on the single currency. In contrast, whereas at the start of this month the UK was set to be the first to raise rates out of the major economies, as we close the month there has been a moderation in rate hike expectations for the UK, even though we learnt on Wednesday that another member of the MPC had voted for a rate hike at the Bank's February meeting. This is weighing on the pound, which along with the dollar has been one of the worst performing of the major currencies this week.

There is also some divergence between the European and UK growth outlook. Germany, the powerhouse of the Eurozone economy, is expanding at a quick pace. Its economy grew by 4 per cent in the final quarter of 2010, this compares with the UK, where Q4 GDP was revised even lower this morning to -0.6% from -0.5%, and the detail didn't make pretty reading. Capital spending was revised much lower and business investment fell to 10 per cent from 12.6 per cent, and exports continued to lag behind imports. Worryingly, government spending was revised higher and grew by 0.7 per cent at the end of last year; the original figure was a fall of 0.4 per cent. The austerity cuts are set to take hold this year, which will remove a major crutch to UK growth.

And the UK growth outlook may not be any better for the first quarter. Yesterday's CBI report on retail sales in February was dismal. It fell to an 8-month low, and suggests that weakness in spending in January, which was attributed to the snow, was actually a deteriorating trend in consumption. This is bad news for the UK economy, which relies on citizens spending their cash on the high street to grow.

The pound fell immediately after the downward revision to GBPUSD, but a glitch on the London Stock Exchange disrupted trading in some UK listed stocks, however the futures market is trading and the FTSE 100 March future was fairly flat after the GDP release. However, it is trading with a wide range, possibly caused by the problems at the LSE.

Elsewhere, Brent crude oil continues to come off after spiking to nearly $120 a barrel at one point yesterday. Now it is back at $112 per barrel after news that Saudi Arabia had reserve supplies to cover any shortfall from Libya as the political uprising continues to disrupt supplies. While this removes the immediate risk of an oil price shock, the wild gyrations in the oil price this week suggest that commodity price volatility is here to stay. Stocks have fallen sharply this week and may find it hard to move back to the mid-Feb highs due to the ongoing investor uncertainty.

Ahead today, US GDP revision for Q4 2010 is released. This is expected to remain unchanged at 3.3 per cent on an annualised basis. The market will be watching this release closely. The slight improvement in the dollar this morning has also pushed gold and silver from their highs.

Irish elections take place today but they are having no notable effects on the single currency. However, voting counts begin tomorrow and the results will be known over the weekend. If there is a strong showing for Sinn Fein - the most against the terms of the EU-IMF bailout package of all the parties- then euro-area assets may come under pressure.

Data Watch:
Switzerland 10:30 GMT (0530 ET) KOF Swiss Leading Indicator index 2.05 2.10 2.06
Euro Area 12:00 GMT (0700 ET) ECB's Nowotny Speaks
United States 13:30 GMT (0830 ET) GDP Annualized (Q4 S) q-o-q 3.20% 3.20% 3.30%
United States 14:55GMT (0830 ET) U. of Michigan Confidence (Feb F) index 75.0 75.1 75.4
United States 15:15 GMT (1015 ET) Fed's Lacker, Diamond Speaks
United States 18:30 GMT (1330 ET) Fed's Yellen, BOE's Bean, ECB's Constancio to Speak
Germany CPI (Feb P) y-o-y 1.90% 2.00% 2.10%
Ireland Holds National Elections

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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