FX news and analysis 20th Feb

USD

The dollar fell on Monday as markets remained broadly optimistic about the outcome of the make-or-break meeting of euro-zone finance ministers in Brussels in the afternoon. In the U.S market participation was down to minimum because of the National President's Day public holiday so volumes overall were low. The outcome of the meeting in Brussels was the main focus for investors who appeared to think a Greek deal was imminent as the euro-dollar climbed to weekly highs of 1.3280, but how likely it is that there will be closure is open to debate. Commentary from key members of the eurogroup including its head Junckers has been positive and this has been the main driver behind risk appetite; Germany has softened its stance by promising not to withhold its share, however, German finmin Wolfgang Schaeuble appears to remain sceptical about how Greece will meet its 120% debt to GDP target by 2020 following the Troika's recent report - and he could still be an obstacle to satisfactory conclusion. Another major set-back is Greece's shrinking GDP which fell a massive 7.0% in the 4th quarter of 2011. The catastrophic effects of a default, however, may prove to be the primary incentive to brokering a deal. Although on the flip-side the ECB's 3-year repos will soften the impact on the financial system. Looking ahead for the week house price data on Wednesday and Thursday and the Michigan confidence Survey on Friday will dominate the docket as the U.S returns to business as usual from Tuesday.

EUR

The euro strengthened on the back of a rise in risk appetite after E.U leaders meeting in Brussels today (Monday) expressed optimism that by the end of the day they would have come up with a definitive resolution to the Greek debt problem. The major hurdles which still need to be overcome for agreement are how Greece will reduce its Debt to GDP ratio to 120% or less by 2020 after a recent Troika report and data showing GDP contracted 7.0% in the 4th quarter of 2011 led to question marks about whether this was a realistic target. One of the primary creditors Germany has been especially sceptical about the ability of Greece to meet this target with the current deal. Therefore further cuts need to come from somewhere, with the possibility of the private sector being asked to shoulder more write-downs or central banks to take a hit or the IMF to contribute more – all of these seeming quite unrealistic however - so disappointment still a possibility. Chart patterns look quite bearish, with the counter-trend rally in the euro-dollar long in the tooth, a potential head-and-shoulders top and the gap from this morning eager to be filled. It may be the combination of unsustainable debt levels and shrinking economy are too great to overcome. The data in summary - Italian Industrial orders and sales rose; French Business Confidence remained the same and French Production Outlook did not fall as much as expected.

GBP

 The pound traded mixed as risk appetite was quite strong on hopes a Greek debt deal would be forthcoming as E.U finance ministers met for a crunch-time meeting in Brussels today (Monday). Nevertheless sterling was down against the euro which was the main beneficiary of optimism about the debt talks, whilst the BOE's recent increase in quantitative easing may have weighed on the British currency. Data out on Monday showed a rise a pleasing rise in house prices with the Rightmove House Price Index (Jan) showing a healthy 4.1% month-on-month rise in February whilst YoY the data showed a 1.4% increase. It would have been expected that such a surprisingly high increase in prices would have led to more of a rally in sterling but the data was the exception to the rule and more instances may be required to confirm an upwards spurt in the beleaguered housing market. Looking to the week ahead much depends, obviously on global risk trends which will be subject to events in Brussels and Athens but that aside the U.K docket is dominated by Public Sector Borrowing on Tuesday, BOE minutes on Wednesday and GDP on Friday.

JPY

The yen fell on Monday as a combination of higher risk appetite following the surprise easing of capital requirements by the Peoples Bank of China (Pboc), an optimistic outlook for Greek debt talks which are reaching a crunch-time in Brussels and negative data for Japanese Exports all weighed in the Japanese currency. Traditionally a safe-haven the yen fell when Pboc reduced the reserve requirement for Chinese banks by 0.5% suggesting the increase in liquidity would halt the slowdown. Commentary from E.U leaders meanwhile also implied a deal was close to being sealed in Brussels which would open 130bn of bailout funds to Greece. In Japan, however, a government report showed that exports fell in January as the yen's strength and weaker global demand eroded manufacturer's bottom line and slowed the recovery. In addition, figures showed a sharp fall in the trade deficit to -1.48tr yen vs -1.46tr expected and -205bn in the previous month. Other data showed a slight fall in the leading Index to 94.0 from 94.3; a rise in the Coincident Index to 93.6 vs 93.0 and an overall fall in department and convenience store sales. In summary the yen remains under attack and has historic reversal potential.