Once again this morning early London trading resulted in EUR/USD pushing higher from its overnight levels.  EUR/USD reached 1.4780 before finding sellers.  Cable was also squeezed higher though the pound is likely to be on the back foot ahead of this afternoon's pre-budget report.  This morning's softer tone of the USD belies the weakness of stock markets and the general increase in anxiety that has followed the intensifying of credit difficulties in Dubai and Greece.  Comments from the Greek Finance Minister this morning reassured the markets that there was no risk of default.  However, Greece has been criticised for failing to instigate sufficient reform during the good 'growth years' which will make austerity now an even more painful process.  It is yet unclear how the Greek government will make the necessary fiscal adjustments, if indeed it can.  The longer this uncertainty persists, the greater the risk of volatility being injected into the EUR.  By contrast, Ireland appears to be making further progress in streamlining its budget deficit.  Today's Irish budget is expected to bring as much as EUR4 bln in cost cutting which is huge in comparison to its 4.5 mln population.  This budget, however, is likely to be overshadowed by the UK government's pre budget report.  The UK joins  Greece, Ireland and the US as one of the few countries likely to register a double digit budget deficit/GDP ratio this year.  

Do to the relative size of it economy, the budget position of the UK is of far greater consequence to global growth and stability than that of Ireland or Greece.  Unlike EMU countries, the UK has the distinct advantage of having a flexible exchange rate.  There may be scant evidence of it already, but the weak position of the UK's effective exchange rate should help promote growth in the UK during 2010 which should help contribute to deficit reduction.  The threat of a credit downgrade in the UK may not have been taken too seriously by the market this year, but unless the UK government can prove good progress towards deficit reduction, anxiety will likely heighten and sterling could post further losses.  Today's pre-budget report should thus offer some concrete signs that the government is taking fiscal responsibility seriously.  Touted as possible measures include a rise in VAT perhaps to 20%, possible rises in capital gains tax in addition to a windfall on bankers bonuses.  EUR/GBP has managed to push down to 0.9010 this morning, though the UK's vulnerable budget position could prevent a strong sterling rally for months.   UK trade data this morning brought a widening in the trade deficit to -GBP 3.2 bln in Oct from an upwardly revised -GBP3.0 bln deficit in Sep.

Japan's economy suffered a downward revision in growth to +0.3% q/q from a preliminary risk of1.3% q/q.  Coming on the back of the government's warnings that the country is suffering deflation this is not good news.  This week's fiscal spending package was no greeted with too much enthusiasm by the market yesterday; its size probably restricted by the terrible budget position. Next week the Tankan report will be key.  The JPY continues to suffer the weight of USD depreciation.  USD/JPY traded as low as 87.37 this morning before edging higher.  

Aside from the UK and Irish budgets, US mortgage applications data are due today.
Jane Foley