The EUR has managed a decent correction higher in London hours supported by a better tone in equity markets.  Spain's IBEX has managed to push almost 1% higher, the Athen's Composite is still out of favour its decline has been limited to just 0.19% at present.   Cleary the issues surrounding the budgets in Spain, Greece and Portugal have not disappeared over the weekend but the G7 Finance Ministers meeting did prompt European officials to show solidarity over Greece.  ECB President Trichet said he believed that Greece would meet tough new targets, French Finance Minister Lagarde said the Eurozone countries would make sure the Greek plan was implemented with Chairman of the Group of Eurozone Finance ministers Juncker indicated that Greece would not be forced to go cap in hand to the IMF.  While it is the interest of Eurozone officials to keep the markets calm, it is too early to say with conviction that Greece will ultimately not be forced to seek out support from the IMF.  Entrenched difficulties connected with collection of taxes in Greece and a system of accounting that can not presently be trusted mean that this morning's reprieve will likely be short-lived.  This week the European Commission is expected to give its opinion on the Spanish budget.  In essence this is likely to be supported, but given the Spanish economy is likely to shrink again this year and unemployment could hit 20%, the implementation of budget austerity promises to be stormy.  EUR/USD bounced from the USD1.3625 area in Early London hours to an intraday high near 1.3712.  

Oil prices have reacted to the softer tone of the USD this morning by pushing higher.  Following the technically significant break below the $71 /b level on Friday, the outlook for the Brent futures contract has been weakened.  Excess supply should pressure oil this year.  However, buyers lifted Brent back above the $70 /b level this morning.

Sterling is on the back foot.  EUR/GBP has broken up towards 0.8800, and cable, whilst off the days' lows is trading down close to 1.5560.  Weekend opinion polls highlighted the danger that this spring's UK general election could bring a hung parliament.  This has been in the market's mind since the end of last year, though with the election nearing it could be increasingly problematic for market sentiment.  Most worrying is the fear that without a clear majority the government's ability of deal with the budget deficit would be hindered.  Weak coalition governments in countries such as Italy and Belgium have in the past been associated with large debt problems.  Talk over the weekend from an ex-IMF official linking the UK's debt issues with that of Spain and Greece has not helped sentiment in the UK.  There were no UK data releases this morning.  Key focus this week will be the release of the BoE's Inflation Report.  

Comments from Chinese Commerce Minister Zhong that the yuan is under 'great pressures' to appreciate will heighten speculation that a move may be seen later this year.  At the G7 meeting, Japanese Finance Minister Kan suggested that the G20 meeting would be a better forum to discuss China.  Growing US-Chinese trade tensions may have reduced the will of some finance ministers to have a public discussion on China this weekend.  

Canadian housing starts are due this afternoon.   
Jane Foley
Research Director
+44 207 398 5024