EUR / GBP - 0.8244 (Last week: 0.8355)
EUR / USD - 1.2290 (Last week:  1.2373)

Yuan revaluation: The Chinese government announced last week they would loosen the peg to the US Dollar. Like most politicians, you need to watch what they do rather than what they say. Initial hopes led to disappointment as the band was not adjusted. Overnight (Thursday) the CNY hit its highest level since the July 2005 revaluation, with the Chinese setting the daily mid-point to the USD at 6.79, from 6.83. The move was clearly intended to deflect some of the pressure about to be heaped on them leading up to the G20 meeting this weekend. If there are any significant moves in the trading band after the G20 we will (i) give an update on the implications and (ii) be surprised.

Euro: The Euro has taken a few knocks this week, the usual suspects popping their heads up.. Greece, Spain etc. Greek-German bond spreads (a sign of implied risk) continue to widen. Spain said they will go to Double Dip recession in the second half of the year. Plans to publish bank stress tests have led to admissions so far from Greece, Austria, and the UK that their banking systems are facing severe strains. Sovereign risk is part of the problem facing the banks but non performing loans are still not improving. It is increasingly trading range bound against the Dollar closing between 1.2250 and 1.2350 for most of the week. Continued talk of economic slowdown in the US, backed up by data and a subdued Federal Reserve statement on Wednesday. New home sales in the US are falling as are durable goods orders. Data mirrors this in Europe where Business confidence in Germany, although high, showed rising worries about the second half of 2010.

US $ Outlook: Range bound prices for EURUSD imply the price is looking for some firm footing. It also implies that is likely to break the range some time soon. It has been struggling to nudge above 1.24 this week and it is easier to see any gains to the upside getting snuffed out by profit taking. If it breaks to the downside, it is likely that investors would allow it to run. Pound The pound had a stellar performance this week. It gained strongly after the latest minutes of the Bank of England's Monetary Policy Committee showed one member voted to increase key interest rates. This was based on the rising inflation (we referred to last week). Sterling has been advancing since the U.K. released a belt-tightening budget, which two ratings companies said could help secure the U.K.'s coveted AAA credit rating. The rate increase helped the pound strengthen to a 6 week high against the Dollar and to its highest level against the Euro since November 2008.

St £ Outlook: More upside is likely for the Pound, especially against the Euro. If it is breaks below 0.8180 the target would be 0.8130 and then below.

Next Week:
Mon - German inflation data
Wed - UK GDP, German Unemployment
Thurs - European Purchasing Index
Fri - EU unemployment, US Unemployment (Non Farm Payrolls)
This report is for information purposes only and should not be used as specific buy or sell advice.