The move away from risk evident in Asia started to reverse in early European hours.  EUR/USD held above the USD1.4880 level and edged back above 1.4940 even though the soft tone in stocks followed through into early European hours.  As EUR/USD turned higher so did the usual barometers of the risk trade such as EUR/JPY and AUD/USD.  A run of good European data early in the session supported the mood.  The German IFO index registered a stronger than expected 93.9 with strength being registered both in the current assessment and expectations indices.   German Q3 GDP was confirmed at +0.7% q/q and UK Oct mortgage approvals data also rose.  The only fly in the ointment was the inability of French Nov business confidence to rise above Oct's reading.  Sterling has suffered a weak session despite the better data.  The falls in cable, which have seen it testing the water below GBP/USD1.6500 this morning have been linked with a Telegraph press report which ponders the horrendous size of the budget imbalance in the UK and the difficulties that face which ever government is in power next year.
 
If anything BoE Governor King's address to the Commons Select committee this morning added a couple of better predictions on the UK economy to those which accompanied his presentation of the Nov Inflation Report earlier this month.  King forecast that the UK should expect pretty buoyant growth rates in the short-term.  These forecasts echo the comments from the IMF's Strauss-Kahn yesterday.  That aside, King reiterated his warning that UK inflation would jump sharply near-term though would be pulled down by excess capacity medium-term.  MPC member Posen raised the point that there is genuine uncertainty about the impact of QE, though the MPC have until February to come up with a consensus as to whether the plan should be extended further.  Cable found buyers at 1.6500 this morning, EUR/GBP hit resistance near 0.9060. 

While European markets have shrugged off much of the overnight gloom, financials are set to remain in focus through the rest of the session.  Overnight reports that Chinese banks risk sanctions if they do not meet industry capital requirements followed a study by S&P calling into question the health of 45 global lenders banks and a rumour that a German bank's majority owners would allow the bank become to insolvent.

The central bank of Russia cut rates to a record low this morning.  This is perceived to be part of an effort to reduce speculative inflows. 

This afternoon the release of the preliminary US GDP data could be directional for the risk trade today. US house price data, Nov consumer confidence and crucially the minutes of the Nov 4 FOMC meeting are also due.

Jane Foley