Greece sells bonds. ECB, BoE meetings awaited.

The Greek government has moved to capitalise on this week's narrowing in the Greek-Bund 10 yr spread by announcing that it is proceeding with its sale of 10 yr bonds. The spread widened modestly this morning in part in a reaction the issue but also in response to the news that the German Chancellor continues to dig her heels in with respect to financial assistance for Greece. A meeting is scheduled between Greek PM Papandreou and Chancellor Merkel tomorrow. Counter to market hopes, this is now being reported as a meeting about maintaining good relations rather than one that will result in aid for Greece. It remains possible therefore that Greece could yet be forced to seek support from the IMF, or even consider moving back to a flexible exchange rate. If civil protests make it impossible to implement the structural reform that is necessary to bring Greece's budget deficit drastically lower, it is possible that Greece may be left with little option but to take drastic action. Greek unions are scheduling a third mass walkout on March 16. Clearly Greece is far from out of the woods; there is plenty of scope for more bad news. Meanwhile as austerity bites in many parts of Europe repercussions on Germany growth potential, the largest exporters within the Eurozone, are inevitable. Today's scheduled ECB's meeting is widely expected to announce a continuation in the ECB's exit plan, with the 31 March 6 mth liquidity-providing operation likely to be the last. Given that austerity threatens to slow the pace of the Eurozone recovery, this may have an impact on the timing of the ECB's exit plans. It certainly seems increasing likely that there will be no ECB rate hike until 2011. This morning Q4 Eurozone GDP was confirmed at just +0.1% q/q, the French unemployment rate rose to 10%. EUR/USD has managed to push off its early lows, helped by talk of decent demand for the Greek 10 yr bonds, but the medium-term outlook for the EUR remains poor. Early in the London session EUR/USD had fallen back to 1.3636. The wave of general risk aversion overnight was also a function of further fears of Chinese tightening ahead of Premier Wen's key speech tomorrow.

The yen also benefitted from risk aversion overnight with USD/JPY touched key technical support in the 88.20 area. A break below, however, was not extended as risk appetite improved a touch in London hours. However, Wen speech tomorrow or a disappointing outlook in the US payrolls data also tomorrow could trigger a break of this key support.

The BoE is widely expected to keep policy on hold today. However, since the Feb meeting various BoE officials have fallen over themselves to make the point that a pause in QE means that the door is still open; this means some discussion on the topic is likely today. While further QE remains a possibility going forward, cable's free-fall earlier in the week is likely to have ruffled a few feathers at the Bank and could put paid to the possibility of any increase in QE at least ahead of the May Inflation Report. A sharply lower reading in the Halifax house price index (-1.5% m/m) has underpinned concerns over the robustness of the UK housing market recovery in the wake of falling real wages and elevated unemployment levels. Cable, however, has benefitted from the generally softer USD this morning and pulled higher towards USD1.51.

Hawkish remarks from the Riksbank this morning stating that interest rates will rise in the summer and that there is more evidence of the upturn sent EUR/SEK lower sharply this morning.
Can building permits and Ivey PMI, US initial claims, factory orders and pending home sales are due.

Jane Foley
Research Director