Market sentiment took a hit overnight as traders showed fresh nervousness about Greece’s chances of avoiding a default. A deal appeared to be sorted out yesterday afternoon but after their meeting late in the day, EU Finance Ministers withheld a new bailout and ordered Greece’s government to agree to further cuts to the amount of €325 million. They also demanded that Greece get Parliamentary seal of approval (rather than verbal agreement) that they are ready to deliver on past and new pledges before granting a second bailout package, which, if a deal is done, could come as early as next week. Despite the setback, however, the euro is trading close to two month highs versus the dollar as we go into the weekend, bolstered by optimism that a deal will eventually be done.

There was little reaction to yesterday’s ECB policy meeting which saw the central bank leave rates on hold and provide no real clues as to whether a further rate cut is on the cards, though the markets has pulled back in terms of its expectations. Sterling rose versus the dollar and euro yesterday after the BoE announced that its was increasing QE by Stg50bln, a smaller amount than some had anticipated. It was supported ahead of the announcement by December’s better than expected industrial production data, which showed that output was up 1.0% on the month. The GBP, however, gave up gains versus the dollar overnight while remaining generally steady against the euro. This morning sees the release of UK PPI data for January, which will be watched ahead of next week’s CPI release for the same month but, in general, it is events in Europe that are likely to set the tone for the Pound going into the weekend.