USD weakens versus GBP
Overall, Sterling has performed well, having briefly broken out of its 1.56~1.60 trading range against the dollar this morning despite the release of poor UK confidence data overnight, while consolidating against the euro.
Ahead of the Euro group meeting later today the EUR/USD will be vulnerable particularly after German Retail Sales came in on the weaker side and markets being led to believe there will be an agreements reached at the close of the meeting of EU Finance Ministers and Central Bank Governors in Denmark with press conference to follow. We expect they will keep pressure on periphery states to continue reforming their economies. A press conference follows after the London close but the major topic of discussion will be what to do with the EFSF and ESM.
The EU Commission has given Finance Ministers a number of options to pursue in the hope that a larger firewall will help to encourage further support from the IMF and Emerging Market economies. The most expensive option, which has already met with German disapproval, would be for the EFSF to be made permanent rather than expire in 2013. That would give the eurozone a firewall of €1 trillion, with possible IMF and other buy-in doubling that number and convincing markets that the firewall is enough to contain Spain, Portugal and Italy if needed. The risk is that finance ministers get a little complacent after their recent success in reducing periphery bond yields and instead choose to only run the EFSF until 2013 and then rely solely on the assets in the ESM. So some compromise will be needed but it may take a number of days to get there.
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