The euro has managed to claw its way back from eight month lows on reports that Europe is considering increasing the size of its bailout fund. The talk prompted a round of short covering. Some players in the market thought this could be extended given the fact that a lot of traders have recently sold the currency. Dollar/euro is well up from yesterday’s lows of $1.3364, with modest gains also seen versus the yen and sterling. Overnight Japans’ government said that it will bring forward plans to ease the pain of a stronger yen but failed to provide any details. At the same time though, there is nothing fundamental behind the euro’s recovery and it remains vulnerable to fresh doubts over Europe’s ability to draft a plan to deal with the fiscal crisis.

Regional currencies in Asia also rebounded overnight after two weeks of selling, with the fall back in the US dollar benefiting commodity currencies like the AUD and NZD.

Asian stocks jumped on signs that policymakers are making progress, with these gains also helping to lift general market sentiment. European stocks are expected to open in positive territory this morning, adding to yesterday’s sharp rally which lifted stocks well off last Friday’s two and half year lows. Meanwhile, data released early this morning showed that German consumer confidence held steady going into October at its lowest level in nearly a year, with economic uncertainty continuing to weigh on household sentiment. Although the index is well off highs, there had been fears that it could fall even further. Sterling rose against the dollar yesterday on talk of heavy buying by a UK bank, going on to see further gains overnight given the pickup in general market sentiment. However, it remains vulnerable to selling pressures as markets anticipate further QE from the Bank of England, possibly as soon as next week.