Greece puts more austerity on the table but is not out of the woods;
Cable soothed by better data.

Greece has put a promise of further austerity on the table in the hope that this will be sufficient to buy some sort of guarantee from the EU for its debt. The better performance of Greek bond yields this week which has taken the 10 yr Greek-Bund spread below 300 bps this morning is a sign that the market believes that the EU has little option but to ensure that Greece is not forced to default on its debt. From a political perspective, no support package can be offered to Greece without a commitment from its government to drastically reform budgetary spending since without reform there can be no guarantees that Greece will not limp from one crisis to the next. Today Greece has announced a freeze on pensions, a cut on civil servants bonus payments, another EUR2.4 bln spending cuts and a rise in VAT to 21% from 19%. The EUR rose on the news but has been unable to extend these initial gains. The Greece budget does not stretch as far as last year's Irish budget which cut the wages of some public sector workers. Given the mass protests against austerity in Greece there is still a large question mark as to the appetite of the electorate for further austerity. The proof of the pudding is in the eating; there is still a very long way to go before Greece's budget deficit is anyway near the 3% of GDP limit outlined in the Maastricht Treaty thus neither Greece not the EUR is not out of the woods yet. EUR/USD is currently positioned close to the centre of this morning USD1.3660 to 1.3595 trading range.

Despite some early selling pressure, cable has managed to hold above the USD 1.50 level for the majority on the London morning. A strong showing in the overnight release of the UK's Nationwide consumer confidence data was followed by a better than expected outcome for UK services PMI. Confidence rose to a 2 year high while the Feb PMI more than reversed the fall in January. Both sets of data strengthen the view that the abysmal performance of January data was a function of bad weather thus these data and boost the likelihood that the UK economy will have recorded growth in Q1. That said, the fear of a hung parliament in the UK and the negative connotations of this with respect to budget management continue to cloud the backdrop for sterling suggesting that scope for further downside in cable remains. As long as cable remains below the USD1.51/1.520 level, the technical outlook remains bearish.

The Australian economy grew by +0.9% q/q in Q4 following an upwardly revised +0.3% q/q in Q3. The AUD failed to benefit on the report with the view that the RBA may leave interest rates on hold for the next few months and better tones of both the EUR and the GBP undermining the AUD. That said the RBA is likely to be hiking rates again before the Fed, the ECB or the BoE move away from the starting blocks. This suggests there may still be opportunity in the AUD in pullbacks.

This afternoon US ADP employment change, ISM non-manufacturing data and the Fed's Beige book are due.

Jane Foley
Research Director