EUR/USD has been under pressure in European hours; the USD finding support despite the modest upward push in European equity indices. Risk appetite has been unsettled by yesterday’s news from Brazil that if would further tighten restrictions to stop short-term speculative inflows and by talk that other emerging countries would follow suit. The Turkish central bank this morning has dismissed talk that it is considering such a move. The better position of the USD in Europe has knocked gold, oil AUD/USD and NZD/USD off their overnight highs. USD/JPY found support in very early London hours on comments from the BoJ’s Shirakawa. Sterling remains under pressure on fears that fiscal consolidation will hinder the potential for growth.

Comments this morning from the Director General of the CBI kept the focus on the awful position of the UK government finances. Lambert aligned the CBI with the plans of the Tory party to reduce the budget deficit swiftly and sharply and rejected the more gradual approach to deficit reduction favoured by the incumbent government. Yesterday’s terrible UK Oct PSNCR data had served as a reminder of the need to put the fiscal situation in order starting from next year. Insofar as tax hikes and spending cuts will contain growth potential going forward and underpin the case for lower BoE rates for longer sterling has been under pressure. Further negative news came from the Nationwide building society’s prediction that UK house prices may fall again next year. Cable has trended lower from the start of the European session, presently edging down to 1.6545. EUR/GBP has seen a high this morning of 0.8990.

The BoJ raised its assessment of the economy at its overnight policy meeting while maintaining its outlook for low interest rates. In the press conference Governor Shirakawa commented that it is monitoring currency markets which took USD/JPY higher from the 88.70 level and played down talk of a widening rift between the BoJ and the Japanese government which warned last night that the Japanese economy is in deflation. EUR/JPY continued to edge lower towards the 132.10 level consistent with the reining in of risk appetite.

The EU has appointed Belgian Van Rompuy as President. Belgium is a country characterised by two different languages and cultures. Belgium was very pro EMU ahead of its initiation in 1999 and has seen solid levels of support for a move towards a federal Europe which would arguably help dissolve the impact of its own national differences. Van Rompuy is seen as a successful conciliator and mediator. Overtime the appointment may help increase the perceived coherence of EMU but it should not have any near-term impact on the EUR.

There is no key US or Canadian data due for release today.

Jane Foley
Research Director
+44 207 398 5024