Cable has resumed its downtrend this morning with Friday's short-squeeze higher appearing to have prepared the ground for a fresh round of short positions.  Warnings from Moody's that both the UK and US governments face the difficult task of bringing down their debt burdens without damaging growth and comments from the BoE's Barker that the UK economy may contract again for one quarter served as reminders of the difficult UK economic landscape.  Meanwhile weekend opinion polls continued to point to a hung parliament; the YouGov polls published by the Sunday Times putting the lead of the Tory's at just 4 points over Labour.  Mar house price data from Rightmove posted a very moderate +0.1% m/m rise for March with additional supply appearing to have dampened the recent squeeze higher in prices.  Later in the week UK labour data may have the potential to support the pound.  However, with labour data likely to be overshadowed by the last set of public sector finances data ahead of next week's budget, the outlook for the pound remains vulnerable.  

EUR/USD pressed lower this morning largely on the back of remarks from German and French Finance Ministers which suggested that there would be no decision on aid for Greece at this week's 2 days EU meetings due to start today.  Greece is seeking help in bring down the cost of financing its debt.  It had been thought likely that the EU would announce a package of bilateral loans and guarantees this week.  Greece faces the task of financing as much as EUR55 bln of maturing debt this year, EUR20 bln in April and May.  The rise in yields presently required to compensate investors for the additional risk of holding Greece debt compounds the difficulties of reducing the budget deficit.  While the crisis in Greece has abated, it has not yet been unravelled suggesting the possibility of further pressure on the EUR going forward.  Key support lies at EUR/USD1.3680.  
The softer EUR allowed EUR/JPY to push a little lower during the London morning, but the JPY was softer vs the USD ahead of this week's key BoJ policy meeting and the expectation that the BoJ will extend policy measures in the fight against the threat of deflation.  USD/CAD has traded sideways between CAD1.0150 and 1.0200 following Friday's leg lower on the back of the strong Canadian jobs report.   

Comments from Chinese Premier Wen that pressure surrounding its exchange rate policy amounted to protectionism will have dampened last week's speculation that China could announce a modest revaluation in its currency during Q2.  That said, with inflation a key focus for the PBOC this year, speculation of a move ahead of the June G20 meeting is likely to persist.  

Canadian vehicle sales data, US TIC data, industrial production and empire manufacturing are due today.

Jane Foley
Research Director