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  •  Yields erode support for EURUSD
  •  The AUDJPY makes initial break out of recent range

The euro is under pressure:

The single currency has started the weak on the back-foot due to a few factors:

  •  The uncertainty about who will take over the ECB after Trichet's term expires, after the resignation of Axel Weber (ultra hawk) President of the Bundesbank.
  •  News that Greece and Italy have voted against imposing harsh debt to GDP ratios.
  •  European Union finance ministers meeting that may throw up even more disagreements within the currency bloc about a long-term resolution to the debt crisis.

This is weighing on investor confidence and also on expectations of near-term ECB rate hikes.

The spread between the Euro-area overnight interest rate and 3-month Euribor (the inter-bank lending rate) has continued to widen as near-term interest rate expectations for the euro area fall. This is weighing on EURUSD, as you can see in the chart below.

Without the benefit of yield support we think the euro will remain on the back foot.

It will take either a stronger tone to economic data, hawkish rhetoric from ECB members or a satisfactory solution to the sovereign debt crisis, and positive comments from this week's eco fin min meeting that a resolution is forthcoming, for yields to recover and boost EUIRUSD.

Eonia -3-month Euribor ( white line) and EURUSD.


The Aussie is breaking higher:

AUDJPY broke out of its recent range today and is currently trading at its highest level since May 2010 at 83.60. This pair has been very choppy on a short-term basis, so we would expect a bit of a pull-back before embarking on another leg higher. If the pair can manage to close above here, then it would set the stage for further gains.

However, below 83.20 - the 200-hour moving average - we would be careful, as it would suggest that the pair has lost its momentum and we could see back to 82.75 - 50-day moving average- and then 81.90 - the 100-day sma.


Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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