Fitch Sees Risk Of Sovereign Crisis Contagion 'Exaggerated'

EURUSD has continued to recover from last week's rout, with the short term uptrend off Friday's 1.3586 lows providing the platform for a test of the 1.3750 pivot level, and an earlier high of 1.3774. The EUR and broader risk sentiment has been buoyed by the news that ECB President Trichet has decided to cut short a visit in Australia to return to Brussels; fuelling speculation that an EU-wide plan may be announced imminently that would address current sovereign debt concerns. ECB officials have repeatedly stated that any bailout of Greece would be categorically out of the question (repeated again today by member Nowotny), but ratings agency Fitch stated this afternoon that the EU could 'find a way' to help troubled sovereigns, and added that the risk of contagion within the EU was 'exaggerated'.

There has been another session of limited economic releases; in the morning we saw German CPI (EU harmonized) come in slightly higher than expected at 0.8% YoY compared to the forecast 0.7%; but there is unlikely to be anything in these numbers that will alarm the ECB. UK trade balance figures were worse than expected as the deficit widened to GBP7.278bn from GBP6.78bn; whereas the market had been looking for a slight contraction; however despite GBPUSD came under selling pressure from models earlier in the morning, the pair has recouped most of these losses – now trading virtually flat on the day.

USDJPY has been on a round trip from 89.35 levels up to highs of 89.81 (on the back of Trichet news), but is now back to 89.35 as the afternoon session saw US data disappoint; the IBD economic optimism index slipped to 46.8 in February from 48.8 in January, and later, wholesale sales missed forecasts with a 0.8% MoM gain in December against expectations for 1.00%.

Tomorrow we expect to get an uptick in economic releases; of particular importance being UK industrial production and the publication of the BoE Quarterly Inflation Report. Although the MPC decided to not to expand the asset purchase programme at the last meeting (which should be a GBP-positive development), there remains considerable uncertainty in economic projections going forward – particularly how the unnerving current trend of accelerating inflation and subdued growth will weigh on the economy (and currency). There will also be a number of releases from the Scandinavian economies with Norwegian CPI (2.2% YoY expected, 2.0% prior), along with Sweden's industrial production for December (0.5% MoM expected, 0.2% prior) and AMV unemployment rate (5.7% expected, 5.6% prior). The latter two releases may be particularly significant considering Thursday's meeting of the Riksbank; and although a first hike is not expected until autumn, a faster than projected rebound in the Swedish economy may force the central bankers to adopt a less dovish tone.

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