There was a bounce in the euro yesterday and overnight on talk of the possibility of China stepping up its European bond purchases, as well as easing risk aversion on the back of a rise in Asian share prices. The talk on China was fuelled by newspaper story from a professor at the People’s Bank of China that the country should expand its purchases of euro zone sovereign debt and should increase direct investment into Europe. Meanwhile, speculation of a rate hike by the ECB was reignited by remarks by the ECB’s Stark who wrote in an article that the goal of preventing a financial meltdown has been achieved and “the time has come to return to normal.” The Greek problem, however, continues to overshadow the single currency and downside risks still remain.

Markets will be keeping a close eye on all events that could provide updates on the fiscal situation, including today’s G20/G8 meetings. This afternoon also sees the release of the second estimate of US Q1 GDP. The preliminary data disappointed but a modest upward revision from an annualised growth rate of 1.8% to 2.2% is anticipated. At the same time though, this is not expected to alter the markets view that the US central bank will leave rates on hold until into 2012.

Despite confirmation that UK growth was sluggish in Q1 sterling traded at two month highs versus the euro yesterday, as the single currency remains undermined by sovereign associated risks. However, given the challenges facing the UK economy, the GBP remains on the back foot versus the USD. Indeed, the euro regained some ground overnight, and upside against the single currency is also seen as limited with the detail GDP report once again raising questions about the vulnerability of the UK’s economic recovery. Overall Sterling currently trades 3 points from its recent lows against the Euro with the market clearly consolidating.

This is a good time for Euro sellers to cover positions, a close above 1.1485 will signal a key reversal in trend for Sterling which the market is very close to seeing. The higher yielding currencies continue to perform well with the NZD trading at 2.0120 this morning, already down over 1% from this morning’s opening price. The AUD is also strong in early trade, buoyed by a shift in risk which may well see the AUD test the recent lows against the Pound.