The news that ECB President Trichet was returning from Australia a day early to attend a scheduled meeting of EU leaders injected hope that a bail-out plan for Greece may become more probable.  A bail-out at this point would contradict the rhetoric from ECB officials to date.   That said Eurozone officials will be aware that an increase in contagion from the Greece situation would increase the chances of a EUR crisis.  While Greece may yet be forced to go cap in hand to the IMF, a development of a system of incentives and rewards from wealthier EMU member countries for countries in crisis cannot be ruled out.   EUR/USD rose back to the 1.3740 area on the news of Trichet's return, the yen is softer and stock markets have edged higher; the Athens Composite posing a 3.2% gains so far this morning.  Risk appetite, however, is being reined in the approach to the US open.  

Having rallied through the Asian session sterling turned its back on the market's improved sentiment.  European traders had awoken to the news from the BRC of a very dismal UK retail performance in January.   Total sales rose a disappointing 1.2% y/y.  Bad weather and the January 1 hike in VAT likely contributed to the sour mood of consumers but with this suggesting that the pace of the UK's economic recovery could remain sluggish into Q1, it provided a reason for sterling to push lower at the start of the European session.  The release of the worse than expected UK December trade deficit brought more back news.  The visible deficit expanded to -GBP7.3 bln.  Although the government's car scrappage scheme encouraged a temporary boost to imports, there is yet a lack of evidence that the weakened pound is provided support to the export sector.   Cable fell back to a morning low of USD1.5572 before the better than expected result of the UK's GBP2000 mln 2034 gilts auction provided some relief.  The bid/cover was a respectable 2.08 which will stave off concerns that bond investors have become disillusioned with the government's budget position.  The debt issues have not gone away, however, and with the general election nearing sterling is very vulnerable.  Technically the GBP/USD 1.5500/40 area is key for the pound; having already broken below the Oct low of GBP/USD 1.5700 a break below this swing target could prompt a leg lower for sterling.  The push higher in EUR/GBP this morning supports the weaker bias in the pound.  

The AUD rallied overnight following warnings from RBA Stevens about keeping rates too low for too long.  The AUD suffered setbacks last week on the surprise announcement from the RBA of steady rates this month and then from poor retail sales data.  Last year's rate hikes have lifted RBA policy from its previous emergency position and the pace of tightening going forward is likely to be moderate.  That said it remains likely that the RBA will hike again this year before the Fed is off the starting blocks and this will likely offer the AUD some protection on the downside, though it remain vulnerable to fears of slower growth in Asia.  

This afternoon US ABC consumer confidence data are due.

Jane Foley
Research Director