The euro hit eight month lows of $1.3314 versus the dollar in overnight trade, weighed down by the announcement from the Greek government that it will miss this year’s deficit target. The deficit this year is now expected to be about 8.5% of GDP versus about 7.5% previously. Still weighed down by recession, the economy is forecast to contract by 5.5%, compared with a previous forecasts of 3.9%. It has also been announced that Greece and its EU/IMF inspectors have broadly completed negotiations about the payment of the next set of bailout funds. The euro’s fall versus the dollar also pushed the single currency lower versus the GBP, though it has managed to claw its way back from overnight lows. Meanwhile, with risk appetite low the AUD hit a 10-month low, with many emerging Asian currencies also under some pressure.

The euro looks set to remain vulnerable to downside pressure over the week as markets continues to focus on the Greek debt situation. European monetary policy, however, could also dominate the headlines this week with the ECB and Bank of England making policy announcements on Thursday. The ECB is not expected to make any changes to interest rates. However, its post meeting press conference will be interesting with markets looking for any softening in tone in light of recent sluggish euro zone activity data, as well as the ongoing pressures on the sovereign debt side, though last week’s news of a flash HICP of 3.0% should dampen speculation of moves towards early rate cuts. The BoE has indicated that it is moving towards further monetary support but the MPC may decide to wait until November before making any changes. At the very least though, we expect one if not two more MPC members to join Adam Posen in calling for more QE.