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 4th 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 4th quarter GDP and University of Michigan confidence survey on Friday.