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As protestors stalked the streets of Athens, lawmakers managed to pass austerity measures that are necessary to release the EUR 130n of fresh bailout funds that are the only thing between Greece and default.

When the vote passed this set off a relief rally, EURUSD is back above 1.3260 and European stocks have opened higher. The positive sentiment was given a boost when German Finance Minister Schaueble said that Greece will be saved one way or another, and now investors wait for the Eurogroup Finance Ministers to ratify the next bout of  bailout funds when they hold another emergency meeting on Wednesday.

Until the finance ministers rubber stamp the bailout deal then we won't know for sure that Greece is out of the woods. To release the funds then the ministers need to be confident that Greece's political leaders will apply the austerity measures post general elections that are due to take place in April. We still need to get confirmation this will happen and that Greece's politicians won't just give lip service to European demands before reneging on tough decisions post the election.

So there are still many stumbling blocks, which could keep the markets range bound in the next couple of days. EURUSD may find it hard to break above 1.3320/ 30 - the high from last week - until we hear from Europe's finance ministers on Wednesday, so expect some choppy ranges.

Added to that the focus of attention may now be on the PSI discussions. On Friday rating agency S&P said that a selective default rating would be applied to Greece if Collective Action Clauses (CACs) are applied to private sector bond holdings - essentially forcing the holders of Greek debt to take losses on their bonds against their will. The head of the IIF - the negotiator for the private sector - called on the ECB to take losses on their holdings and for Greek lawmakers to pass austerity measures necessary to receive the next tranche of bailout funds. Without the bailout funds then the private bond holders the IIF represents would not get their money back when a major redemption is due on March 20th.

So as the PSI discussions move into their final leg there is much room for upset so this recovery rally is fragile and could be easily disturbed.

The rating agencies reminded us that Europe's problems are far from over. S&P downgraded 34 Italian financial firms on the back of increased funding problems late on Friday. The rating agencies might be behind the curve as the ECB has stepped in to support the banks with its LTRO loan plan, however banks that rely on their central bank for finance because no one else will lend to them pose an enhanced credit risk and the S&P's action is a reminder that all is not as it should be in the European financial sector.

The absence of economic data today means that headline risk is even more pronounced that usual. Right now headlines are fairly positive, but if there is any sign that PSI negotiations will end in CAC's then sentiment could change.

The market may not be looking at the bigger picture right now, but risks remain. The latest tussle for bailout funds has been the worst yet. Going forward there is no more room for fiscal slippage in Greece, yet that is what is likely to happen - we have seen in the past that austerity is difficult to implement in Greece's extremely fractured financial system. How many more weekends can we have like this past one before either Greece or the Eurozone or both think that it's not worth saving the union in its current form and Greek exit becomes imminent?

But the markets aren't concentrating on that right now. The euro, the Aussie, stocks and Europe's peripheral bonds are all moving higher in unison today. However, we would note that we are approaching some key resistance levels: 1.33 in EURUSD, 1.0800 in AUDUSD, and 1,370/80 in SPX 500, so beware some profit-taking at these levels. US stock futures are also pointing to a healthy open later.

We need to get more clarity on the PSI discussions and overcome the hurdle of the Eurogroup finance ministers meeting first before we think EURUSD can target 1.35 in a meaningful way, however the recovery in the recovery in the euro this morning suggests that there are bulls out there and dips in the single currency vs. the dollar seem to be short-lived.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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