With market sentiment on a positive wave after the details of Europe’s debt deal, the euro hit seven month highs of $1.4247 versus the dollar in late afternoon trading yesterday. It came off these levels overnight as investors took a breather after a huge relief rally but further short term gains could be seen. While the deal, which includes an agreement that private investors would accept 50% losses on their Greek debt holdings, leveraging of the EU bailout fund and re-capitalisation of its banks, is unlikely to solve all Europe’s financial problems, the clear signs of progress have significantly improved market sentiment. Long term though, the euro could remain vulnerable as we still need to know the details of where additional funding is going to come from.

As also remains the trend in a risk driven market, the news that the US economy grew by a solid 2.5% (on an annualised basis) in Q3 was also positive for the euro. The fastest growth rate in a year, the breakdown of the GDP shows strong growth in consumer and investment spending, as well as a 4.0% rise in exports. Imports meanwhile were up a much smaller 1.9%, allowing net trade to contribute 0.2% to overall growth. Finally, if inventories had not fallen, GDP would have been as high as 3.6%, suggesting a fairly solid domestic economy.

Today sees the release of US personal income and spending data for September, which could provide some direction. Markets will also be keeping a close eye on the release of the first estimate of Belgian Q3 GDP with the data seen as a good guide for the euro zone figure. Sterling is benefiting from the rally in risk sensitive assets, trading well above the $1.60 level versus the dollar. However, it has lost some ground to the euro, with the EUR outperforming on yesterday news.