Sentiment Lurches From Despair To Euphoria

The huge gains in stock markets
around the world yesterday were not mirrored in by corresponding moves in the
currency markets, which saw only modest gains for Sterling against the Dollar
and Euro. European politics continues to drive sentiment between euphoria and
despair as first a Greek deal looked to have been reached, before this morning
we find out there is still huge disagreements between member states over details
of plan.  The Euro ship is lurching from side to side as traders and investors
rush from one side to the other on the back of every new announcement.  On one
side German officials have been joined by other creditor nations, Finland and
the Netherlands, in calling for the private sector to take on a greater slice of
any write down. On the other side sits France, who are desperately trying to
keep losses away from their banks, who only just survived a recapitalisation
after heavy falls in their share prices in the past few weeks.

With a lack of Sterling data this
week and with the Bank of England meeting coming up next week, the MPC have all
hands to the pump trying to warn the market of another round of quantitative
easing coming either next month or more probably the month after. Several
members have indicated that they may join Adam Posen in voting for further
monetary easing if the economic picture continues to deteriorate. Careful not to
push market expectations to far, the MPC hawk Andrew Sentence has also been in
the press stating worrying about the inflationary effects of another round of
QE. What the Bank is making clear is the clear change of stance from a neutral
wait and see, to a much more dovish tone and for Sterling that looks like it
will be enough stall any sort of recovery against the Dollar in the near
term.

Very little data out for the rest
of the week, but the highlights include US durable goods orders this afternoon
and tomorrow American GDP data. Lastly Friday see the University of Michigan
confidence survey released.

Report by Alistair
Cotton