China pledge to Euro

Following a fairly quiet day for the euro as traders, economists and journalists turned their ire towards ratings agencies instead of Greece, we have had an interesting session overnight.

The Eurogroup meeting that was meant to take place today, to agree upon the terms voted for by Greek politicians on Sunday, has been postponed until Monday in favour of a conference call. This is as a result of the Greek Minister’s paperwork not being fully completed with the written agreements from the Greek party leaders that they will not renege on this latest austerity bill. As it stands at the moment we are not seeing a calamitous slip in EURUSD or other risky assets, in fact Asian indices are moving higher.

The second act of this overnight move has been as a result of a Chinese pledge to do more to help Europe. Chinese Premier Wen Jiabao and the People’s Bank of China Governor Zhou Xiaochuan both stated that more help could come from China although it is not sure whether this would take the form of EFSF or ESM involvement or simply buying the bonds of individual member states directly. Either way we doubt it’s going to come any time soon; China will want the Greeks to have sorted out their house first before a single yuan is pledged. The pressure is increasing on Greece.

Away from Europe and Chancellor George Osborne had some good news to celebrate following the Moody’s outlook action against the UK. CPI fell to 3.6% in January, the lowest since November 2010. Hopefully this is the start of a softening of the inflation picture in the UK and the pressure on households from price increases diminishes alongside.

The Bank of England will be glad for these figures and it will further justify the news in today’s inflation report which will show that the CPI will be close to target by the end of the year. It also means that, with inflation seemingly coming under control, that monetary policy will remain accommodative in the UK for a long while yet; the SONIA curve still maintains that we will not see a rate increase in the UK until 2016 while further QE is expected from the MPC at their meeting in May.

The UK remains in the spotlight today, however, with that Inflation Report and the latest unemployment figures. There is an even split between economists as to whether the unemployment report will show an increase in the unemployment rate to 8.5%, the highest since November 1995. The Inflation Report will likely see Governor King emphasise the risks of inflation undershooting target although we expect to mention that while prospects for the UK have improved in recent months, significant risks remain. Mervyn King has a habit of talking down the pound when he speaks and we expect today to be no exception.

Risk has remained bid through the beginning of the European session after both French and German GDP numbers have come out slightly better than expected. France managed to pull an increase of 0.2% out of the hat compared to an expected decline of 0.2% while Germany’s initial release was -0.2% (same as the UK’s) with economists expecting -0.3%. This shows that any dip within the core of the Eurozone is likely to be shallow and it will be the periphery that acts as an albatross around the neck of the continent. The GDP number for the Eurozone is released at 10am.

Rounding off the day will be the latest round of Fed minutes which we expect to suggest that further policy easing may be forthcoming. The previous minutes emphasised the commitment to keep rates “accommodative” until at least 2014. We think that this round will focus more on the prospect of further asset purchases in the near future.

Indicative Rates Sell Buy
GBPEUR 1.1926 1.1952
GBPUSD 1.5695 1.5719
EURUSD 1.3145 1.3169
GBPJPY 123.10 123.48
GBPAUD 1.4612 1.4638
GBPNZD 1.8735 1.8763
GBPCAD 1.5624 1.5653
NZDUSD 0.8368 0.8390
GBPZAR 12.07 12.12
USDZAR 7.6793 7.7218
GBPPLN 4.9635 4.9900
EURJPY 103.13 103.38

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