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This chaotic week is coming to an end and risky assets are remaining heavily bid in the aftermath of Wednesday’s European summit. Equity markets, commodities and the euro surged yesterday as investors leapt on the opportunity to buy. Most European indices were up around 4% while the euro moved from the late 1.38s in EURUSD into the mid 1.41s and GBPEUR fell into the low 1.13s.

The question remains of course, will this last? Previous summits have been greeted with similar rallies but a lack of follow through from European leaders has seen them dwindle and disappear within a few sessions. If the market is made to think a similar prospect is likely then yesterday’s move could sharply reverse.

The dollar was the main loser yesterday but sterling was also a laggard to price gains, as it has been since February. We think it could be a return of investors looking towards interest rate differentials in the short term possibly. You have to remember that low rates are here to stay in the UK and with our QE2 plan, monetary policy will remain weak for a while. The big gainers yesterday were the high yielders (AUD, NZD) or currencies that have central banks that have flown in the face of falling demand and kept interest rates up (SEK, NOK and EUR). Whether this will last or not depends on whether the markets believe the deal struck on Wednesday is a keeper.

US GDP rose at a faster annualised pace of 2.5% in Q3 according yesterday’s preliminary reading. This showed an improvement versus the previous two quarters and the result was in line with the consensus forecast although personal consumption increased more-than-expected, up 2.4% in Q3 versus +0.7% in Q2, as consumers saved less and drew down on existing savings so as to keep their heads above water.

We get our first test of the European bond markets today as Italy goes back to auction around EUR7.25bn of various maturities. Italian yields fell yesterday in line with other peripheral debt yesterday but then started to rise in the afternoon as investors began to refocus on the political situation and the lack of austerity. Today’s auction will be crucial and if we see the 10yr trip over the 6% level, current prices are at 5.87%, then it will increase the likelihood that this euro rally comes to an end. The auction results are due at around 10.30.

Indicative Rates Sell Buy
GBPEUR 1.1340 1.1368
GBPUSD 1.6063 1.6088
EURUSD 1.4148 1.4171
GBPJPY 121.79 122.06
GBPAUD 1.5063 1.5090
GBPNZD 1.9650 1.9680
GBPCAD 1.5950 1.5980
NZDUSD 0.8165 0.8184
GBPZAR 12.42 12.47
USDZAR 7.7280 7.7817
GBPPLN 4.8823 4.9120
EURJPY 107.26 107.55

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