After a failed attempt to break through the $1.28 level yesterday, the euro drifted lower in late afternoon trade before regaining some ground overnight. The euro found some support in a better than expected German ZEW index for January, with the survey results coming in well ahead of expectations. This has helped to ease fears about a sharp slowing in the German economy. Reports that China is set to ease monetary policy have also helped general market sentiment. However, there has been no real improvement in fundamentals and the euro is largely being held up by a wave of short covering, though traders are unlikely to want to push it too far ahead of a key Portuguese debt auction later today. Portugal is looking to sell up to €2.5 billion of treasury bills later Wednesday in its biggest debt auction since last year’s bailout. Meanwhile, Germany is also in the market today looking to raise about €4 billion. This will be followed by debt auctions in both Spain and France tomorrow.

Markets will also be closely watching Greece’s debt swap talks with international creditors. These are set to resume today and Greece needs to reach a deal in order to secure a new (€130 billion) bailout from the EU and IMF and avoid a default when a big bond redemption comes due in late March.

There are mixed reports as to the fate of the deal with private sector creditors of Greece. Bloomberg reports that negotiators are near to a deal, equivalent to 32 cents per euro. In contrast, there are reports in the UK press (The Independent) that some investors are still blocking a deal in order to negotiate a better outcome. Even if a deal is done it is hardly the case that Greece would be in the clear with regards to a more stressed default further down the line. The situation depends on the pressures on Greek banks, together with the size of any upfront payment demanded by private sector bond-holders. Combined with the current fragility of the talks, this means that there remains a decent chance that Greece will default before the end of the current quarter.

Sterling slipped against the euro on Tuesday as a slide in UK inflation reinforced expectations the Bank of England will ease monetary policy further, while a German sentiment survey improved, helping to ease pressure on the single currency. British inflation fell sharply in December, with the annual CPI rate dropping to 4.2 percent from 4.8 percent in November, supporting the Bank of England’s view that consumer price inflation may have peaked. The weaker reading will add to expectations the BoE will increase asset purchases under its quantitative easing programme next month. Clear evidence of falling prices is a precondition for some BoE policymakers to back QE expansion.
UK data due for release today include the latest unemployment and earnings reports, with the data expected to reflect the impact of a weak economy. Meanwhile, also of interest today will be the performance of equities as markets await reporting’s from financial giants Goldman Sachs and Morgan Stanley.