Range trading defined the majors this morning with dollar supply inhibited the ability of EUR/USD to push higher at the London open. A short-lived gain to 1.4735 was followed by a move down to 1.4685. While the EUR continues to struggle vs the USD, investor sentiment this morning did receive a fillip on the news from the Chair of Euro-area Finance Ministers Juncker ruling out a bankruptcy of the Greek State which sent Greek banking stocks surging. The Greek PM has also made assurances that he was determined to tackle measures. That said, there is still a shortage of detail on how Greece will proceed with respect to it budget and thus underlying nervousness is likely to stay with the market. The difficulties associated with the Spanish budget have re-entered the forefront following yesterday's news that S&P has adjusted its outlook to negative. Spain's problems are not new news. The bursting of its property bubble and interlinked rise in unemployment to 17.9% has already left issuers of mortgage bonds under severe pressure. Spain may be able to hold its budget deficit/GDP ratio below that of Greece and Ireland this year, but its budget issues are arguably more severe given its relatively largely economy. The Spanish PM has responded this morning by saying that cutting the budget deficit was a priority.

The PM of Spain and Greece are yet to put their purse strings where their mouths are with respect to taking action over their budgets. In contrast the Irish government yesterday entered the lion's den by announcing a very painful series of savings which were endorsed this morning by the ECB's Nowotny. Initial indications are that the budget has not increased social unease, though further budget cuts are possible. Ireland may be swallowing a bitter pill but the size of the UK's economy makes it far more important on the global stage. Yesterday's UK budget dodged the issue of spending cuts. Some tax increases were outlined but clearly the pre-budget report was designed to implement the least amount of pain in the run up to next spring's election. EUR/GBP remains in a choppy range. However, insofar as the budget does not bring a resolution of the UK's budget woes significantly closer, sterling is likely to stay weaker for longer vs the EUR on as a result of this budget. Today's BoE policy announcement is likely to be a non-event, with the February MPC likely to be the next policy meeting worthy of significant interest.

As expected the SNB left interest rates unchanged this morning though it did announce it will stop bond purchases in response to the better tone of its economy and banking sector. The SNB kept the wording of its statement dovish, however, stating that it will continue to act decisively to counter CHF gains. EUR/CHF has edged lower this morning but is holding above CHF 1.5110.
The RBNZ also left rates unchanged but stated that if the economy continues to recover, monetary stimulus may begin to be removed around the middle of 2010. This sent the NZD to a high of USD/NZD0.7293 despite protests from the RBNZ's Bollard that the NZD is overvalued for the condition of the economy. The AUD also surged this morning on the back of strong Nov employment data. 31.2K jobs were added and the unemployment rate fell back to 5.7%. USD/AUD has run into resistance at 0.9170.

This afternoon Canadian and US trade data are due.
Jane Foley
Research Director

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