It now seems almost certain that the IMF will provide a substantial role in helping Greece stabilise its fiscal position.  For Greece this means that funds can be achieved at a cheaper price that on the open market.  For the EU it means suffering the indignity of having to admit that it does not have an adequate system in place to deal with fiscally errant members.  While Greece's near-term funding needs may be closer to being resolved, still in place are a wide-ranging set of uncertainties connected with the outlook for EMU.  The IMF will maintain the pressure on Greece to adhere to budget austerity.  Its involvement may also increase the risk that Greece exits from EMU.  One of the main attractions of EMU membership for many countries was the ability to service their debt at German-like yields.  Greek yields are now substantially higher than those of on bunds and the EU have not being forthcoming with political support which could help reduce the differential.  This suggests that Greece may be more motivated to follow the usual IMF course of devaluating its currency.  Meanwhile rather than close ranks to protect the EMU from a further loss of credibility over Greece, the failure of the key members to agree on how to deal with Greece highlights just how inadequate the EMU's system of fiscal controls are.  To make matters worse this morning's decision by Fitch to downgrade Portugal to AA- highlights that Greece is not the only crack in the system.  This is the lowest point for EMU since inception yet there is a tangible risk that the outlook for the system may deteriorate further and this should ensure the EUR remains under pressure.  A low of EUR/USD1.3347 has been printed today and the medium-term downtrend remains in place.  Eurozone economic news was completely overwhelmed by politics this morning, though the release of the better than expected German IFO data did for a while help staunch the EUR's wounds.  IFO rose to 98.1 in Mar from 95.2 in February and followed better than expected manufacturing PMI data from Germany and France for March.  January data were less encouraging with Eurozone industrial orders dropping 2.0% m/m.  

The 12:30 GMT UK budget is the overwhelming influence for UK markets today.  The budget will almost certainly be replaced by another after the general election (which is likely to be confirmed today as May 6).  Nevertheless, the Labour government may return after the general election as part of an alliance with the Lib Dems and both the credit ratings agencies and the markets will be looking for signs as to how the Labour party intends to meet its pledge of cutting the budget deficit by half in the next four years.  Fitch's decision to downgrade Portugal today is based on worsening budget finances.  The same fate may be prescribed to the UK if the budget is not repaired.  Cable has held below the USD1.500 level though the majority of the session with EUR/GBP taking the brunt of the move lower in EUR/USD.  

The strengthening in the USD on the back of the EUR's fall has pressured commodities prices this morning.  The softer tone of oil has in turn weighed on the AUD and the CAD, taking USD/CAD back up to 1.0230.  Given talk that the BoC could be preparing for a rate hike in the middle of the year, the 13:00 GMT speech by the BoC's Carney will be watched today.  The NOK has held up better despite the softer tone of oil.  The jury is out on whether the NOK will raise interest rates this afternoon, suggesting EUR/NOK could fall further on a hike.
US durable orders and new home sales data are due today.
Jane Foley
Research Director