Euro finds support from declining sovereign debt risk and strong eco¬nomic data from Europe

US Dollar
The dollar weakened against the majors towards the end of last week which has continued into today’s morning session on the back of a gain in risk appetite sparked by a record high IFO Business Survey out of Germany on Friday. This move was hampered however by lingering concerns over continued measures by China to slow down its regional economy, having a negative effect on risk appetite. We did see cable breach the $1.60 handle briefly but the pound has fallen down slightly against the dollar as we trade around the $1.5950 levels. The big move against the dollar came in EUR/USD as the greenback hit a 2-month low against a resurgent euro. We saw the currency pair trade at $1.3625 before dropping back slightly to below the $1.36 handle this morning.
No major data. Tentative: Treasury Currency report.


Pound:

Sterling had a mixed start to the new trading week as we saw a rally against the dollar but a steep de-cline against the single currency. Cable saw an impressive full cent gained as the pound traded higher against the dollar as a gain in risk appetite improved global markets. This was however hampered by the ongoing wor¬ries that China may be moving to reign in its ever expanding economy. Sterling’s big move did come in GBP/ EUR as we saw the pound continue its fall against a resurgent euro. The pound headed towards the 1.17 han¬dle as better than expected German economic data was released on Friday in the form of IFO numbers. This move in the euros favour came despite the political turmoil coming out of Ireland as sterling hit s two and a half week low against its European counterpart. Friday’s UK retail sales numbers which were also released on Fri¬day did not help the pounds corner as a negative number of –0.8% was posted after markets expected a figure of –0.2%. A story which is gaining coverage in the UK is Britain’s battle over stagflation. New figures set to con¬firm that growth has slowed, while unemployment and oil prices rise—a problem which blighted the UK back in the 1970’s. Fears are growing that the UK is running the risk of a period of painful stagflation as official figures should this week show that growth continued to slow down in the final three months of 2010. The consensus forecast is that UK GDP data due Tuesday will reveal that gross domestic product grew 0.5% in Q4, following Q3 0.7% expansion and the year’s 1.1% peak in the second. No major data. Speaker 18.00: MPC’s Sentence

Euro:

The euro has started off the week building on Friday’s gains over both the pound and dollar. This was despite political turmoil from crumbling ruling coalition in Ireland as it was balanced out by more hawkish rheto¬ric from ECB President Jean-Claude Trichet, reiterating he is more closely attuned to rising food and energy prices. Declining sovereign risk and strong economic data from Europe continued to support the euro as the single unit hit a two and a half week high against sterling at 0.8533, and the single currency spiking to a fresh 2-month high of $1.3625 against the dollar. The story coming out of Ireland is worth keeping an eye on however, as this may still weigh on the euros future value. Irish Parties are to hold crises talks after the Greens pulled out of the coalition led by beleaguered Prime Minister Brian Cowen. The decision by the Green Party wipes out the governing collations two-seat majority and puts into question the passage of a vital finance bill.
Data: 09.00: E/Zone Flash Manufacturing PMI. 10.00: E/Zone Industrial New Orders m/m


General:
• For those keeping an eye on the value of the Aussie dollar, we saw continued weakness for the Austra¬lian currency as AUS$1.62 was printed against sterling—a seven week low for the Aussie currency.

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