The euro is trading at yearly highs versus the dollar, bolstered by optimism that we are close to a debt restructuring deal in Greece, as well as hopes that the government there will manage to reach agreement on the new round of austerity measures needed to secure fresh funding. Markets are particularly encouraged by indications overnight that the European Central Bank is willing to participate more than previously thought in the restructuring. Little detail is known about how this will work, apart from the fact that it will help to reduce the overall debt burden. As well as gaining ground versus the dollar, the euro saw 7-week highs versus the yen overnight.

Meanwhile, the dollar rose versus the yen in early morning trade amid talk that potentially poor demand for at US bond sales (10-year and 30-year bonds) later this week could see a narrowing in the gap between US and Japanese bond yields. The dollar rose as high as Y77, its best level since late January. US interest rate expectations have already firmed somewhat following the release of last Friday’s better than expected US non-farm payrolls report. This has raised speculation that the Federal Reserve may move forward its timing for an official rate hike.

Benefiting from the general improvement in risk sentiment, sterling rose to a 12-week high versus the dollar yesterday, though is has underperformed the euro. $1.60 remains a point of key resistance for the GBP. However, markets are also likely to be wary of pushing the pound too far ahead of tomorrow’s policy announcement from the BoE. Many are expecting further QE but this is not a done deal and unchanged policy could provide a further lift for sterling.