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The IMF released its updated World Economic Outlook today and the reading was grim. It reduced its global growth forecast by 0.7% to a mere 3.3% for this year, it predicted a mild recession for the Eurozone with growth contracting by 0.5% in 2012, and a slowdown in emerging economies to 5.4% this year.

The one bright spot was Sub Saharan Africa, which the IMF predicts will grow by 5.5% this year, only 0.3% lower than its September forecast. The global lender pulled no punches: the epicentre of the global slowdown in growth was Europe and if policy makers don't step up to the plate then the outcome for growth could be much worse.

It added that global financial stability is deeply in the danger zone, and whether or not the global economy can step back from the brink or if it goes over the edge depends on Europe's policy makers. This does not bode well as Europe's politicians have drawn blanks in the past two years and failed to solve the crisis. However, it was the severe deterioration in conditions, most notably for Italy, that has led to a recession in the currency bloc. So if, finally, Europe's politicians can get their acts together then confidence, and most notably growth, may return.

There have been some developments in this direction recently including ECB support for banks and Germany's approval to allow the EFSF and ESM rescue funds to run alongside each other from the summer, thus boosting the currency bloc's bailout funds to EUR 750bn. Even the IMF has done its bit after proposing increasing the size of funds available to the currency bloc to $ 1 trillion.

But to balance this, Greece and EU authorities are still locked in a battle with the IIF over agreeing the terms of a debt swap to try and reduce Athens' massive debt burden. The head of the IIF said earlier that its final offer of a 70% haircut and 4% coupon rate on the new bonds issued to the private sector is still on the table and it's their maximum offer. However, the EU et al rejected this on Sunday and if a new deal is to be reached before the new deadline of 1st February then we need something or someone to give.

What the global economy does not need right now is brinkmanship from either side during the negotiating process. My personal stance is that Greece's fiscal targets are unrealistic when the economy continues to contract and so need to be adjusted. If this was to happen then we wouldn't be faced with these wrangles every time Greece is due to receive a tranche of bailout funds, which this time could cause Athens to default whilst threatening the very existence of the Currency Union in the process.

One wrong move and not only Europe and developed markets would be plunged back into recession but emerging markets and commodity producers in particular would suffer the consequences. So Lagarde and co made a plea to the global community with this WEO: cough up fellas and boost the IMF coffers. It might save your own skins.

The gloomy IMF outlook was fairly well received by the markets, which remain in cautious mood and booked profits for most of the day. European equities closed down slightly and EURUSD is ending the London Session close to where it started right on 1.30.

The real movement happened in USDJPY and EURCHF today. The yen was weak across the board after the Bank of Japan revised down its growth forecast. This helped to push USDJPY to 5-year downtrend resistance. Above 77.70/80 we could see a more prolonged move higher towards 80.00, which would be the highest level since July last year.

EURCHF was sent higher after SNB member Danthine said that he sees depreciation of the Swiss franc in the future and that the SNB is ready to buy unlimited foreign currencies to support the 1.20 peg in EURCHF. This pushed the pair from 5-month lows back to the 1.2080 recent high, which is acting as resistance. We expect this cross to remain choppy and the SNB to employ more verbal intervention rather than actual intervention to try and stem franc gains, which could limit upside as markets continue to test the Bank's resolve now that Hildebrand is not on the scene.

The pound has been the best performer today after an improvement in the budget deficit in Dec 2011 relative to a year previous to the tune of GBP 2 billion. The pound was also boosted by stronger than expected PMI data out of Europe, especially in the services sector, since Europe is the UK's largest trading partner.

All eyes are on the Fed now, but don't expect it to be overly dovish tomorrow, which could see USDJPY increase its gains.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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