Euro Continues To Climb

The Euro has started the week on
the front foot, pushing through 1.35 in the EURUSD pair and below 1.18 versus Sterling. The recent
rally sparked by tougher than expected comments on rising inflation by ECB
President Jean Claude Trichet and compounded by short sellers buying back
positions, and has probably still got some room to run on the upside given the
current divergence between the EURUSD and EUR two year swap rate, but our
longer term outlook is still Euro negative. The resignation of the Irish Prime
Minister as head of his party and withdrawal of the Green party from the ruling
majority has not as yet dealt a fatal blow to the finance bill, key to Irish
access to bail out funds, from being approved but it will probably now mean a
much earlier than expected general election. Portugal has also re-elected its
President for a second term according to reports, hopefully bringing short term
stability and calming the market enough for the EFSF reforms to be passed
before they inevitably also need to find alternative sources of funding.

Wednesday’s release of the Bank
of England minutes is the Sterling highlight
of the week. (to borrow a phrase from Harry Hill). The reason being is that
changes in voting preferences of the MPC may begin to diverge given the current
inflation rate and the growing need to send a signal to the markets and the
contain inflation expectations. The Pound is facing key levels against the USD,
we will need to see if we can break through the 1.60 level, and a move towards
a more hawkish tone from the MPC may the catalyst to do this. UK GDP for the 4^th
quarter is also release this week (Tuesday) with a rise of 0.5% QoQ and a YoY
figure of 2.6% expected.

Also on Tuesday the Federal
Reserve Open Market Committee meets to decide US interest rates and changes to
the current QE programme. No change to either the rate or asset purchase scheme
is expected so the press release will be dissected to try and pick up the Feds
overall tone and likely future path. In terms of the Dollar, the key data out
this week will be 4^th quarter GDP and University of Michigan
confidence survey on Friday.

Report by Alistair Cotton