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Further support for EUR

Further support for EUR

Although equity markets are a touch lower this morning, sentiment should improve helped by news that the IMF is expected to approve a €28 billion loan for Greece this afternoon after eurozone countries signed-off on the second bailout package yesterday. The decision by Fitch overnight to put the UK on negative outlook look curious in light of its comments that the deficit-reduction plans are ‘credible’ and on track and are expected to be sustained. This could reflect some positioning by ratings agencies ahead of next week’s Budget and reminds the government that they have little scope for manoeuvre.

The ECB Monthly Report should not contain any surprises but we will see the full breakdown of forecasts. The fact that Staff projections are based on three-month libor rates of 1.2% in 2012 and 1.4% in 2014 suggest that expectations of further ECB rate cuts will eventually fade and we could see some formal changes to forecasts in the wake of the Report. That could support the euro in the short-term, but overall currency direction still depends on the effective ring-fencing of Greece. Fourth quarter labour costs should give us some idea over the speed of adjustment in the periphery to regain competitiveness against Germany. So far, Ireland remains the stand out having used economy-wide cuts to incomes to regain its competitive position, but there is less sign of progress in Greece and Italy.

In the UK, rising oil prices are likely to boost headline producer prices in February. The market is looking for a 0.5% rise, but we could easily see an increase of double that. Core inflation, which excludes food and energy should rise by 0.2%, which would be enough to see the annual growth rate ease from 3.0% to 2.9%

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