•  Euro stabilises: Eonia comes off its highs after ECB meeting, but still points to EUIRUSD around 1.3800.
  •  EURGBP finds some support
  •  But the fate of the single currency rests with the EU officials at today's summit

Yesterday's ECB meeting caused a rout in the euro, but the single currency has stabilised somewhat at the start of the London session. ECB President Trichet certainly tempered expectations of a near-term rate hike by saying that the hump in inflation was fully expected and that the level of rates were appropriate. Even though he seems the most hawkish out of all the major central bank heads, the path of rate hikes in Europe is now perceived to be slower than it was last week.

The market was quick to price this new information into asset markets, and the euro fell as yields also came off of their recent highs.

The 3-month euro swap rate (Eonia), which follows government bond yields closely, fell sharply after Trichet's press conference, which mirrored the fall in the single currency - see chart below (euro swap rate is white line).

The spread between German and US 2-year bond yields (see white line on chart below) also narrowed slightly. It now points to EURUSD at 1.3800, previously it pointed to EURUSD above 1.4000.

In the short-term we could see a bit of a pullback in the single currency after the large down move yesterday, but prospects of a return to the November 2010 highs looks increasingly unlikely as it is not supported by euro yield premiums.

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EURGBP

The yield differential between German and UK 2-year bond yields also narrowed sharply yesterday, which weighed on EURGBP. However, the spread has regained a few basis points this morning, which suggests that EURGBP may find good support at 0.8430. Above here the next significant resistance level is 0.8495 - 55-hr moving average.

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Ahead today the EU summit will jostle with NFP's for centre stage. The market will find out if it was right to give Eurozone officials the benefit of the doubt to sort out a credible, long-term solution to the debt crisis. If it is disappointed we could see another lurch lower for the euro.

Best Regards,

Kathleen Brooks| Research Director UK EMEA | FOREX.com

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