Today is yet again another key day in the life of the GBP/EUR cross with the first ECB meeting of the year. We are happy to stick with our view of a 50bps cut followed by a cautiously dovish press conference. Although the ECB are not known as the most reactionary of organisations the French inflation figure released yesterday must have been a surprise; the Gallic HICP falling to 1.2% from 1.6% in December. We think that while our months prediction of a GBP/EUR rate of 1.11 to 1.12 is still valid the intervening period will be lower than 1.10.

Yesterday was a pretty poor day for Europe as a whole with a number of factors holding euro back. Primarily the downgrade of the Greek national debt by S&P to A- has been a long time coming but shows how bad some countries are suffering under a’ one size fits all’ scheme. Whether the other members of the so-called PIGS (Portugal, Italy, Greece and Spain) will be downgraded remains to be seen.

6 months ago we thought that the UK financial sector would recover quicker than the European equivalent due to the lack of bad news coming from across the channel: something had to be up. Yesterday Deutsche Bank announced that it lost around €4bn in Q4 of last year. This shocked investors to the core and sent the share price tumbling by 8% with other banking shares following suit. HSBC also stunned the market after it was made public that a fundraising effort of nearly £20bln was needed.

The falls on financials hurt stock markets globally and heightened risk aversion. Commodity currencies slackened further while the key VIX volatility index closed at its highest level since Dec 16th and with a day of volatile data ahead (ECB, initial jobless claims) further whipsaw is likely.

Global equity bourses were not helped by the terrible retail sales data out of the US. A predicted fall of 1.5% was blown away by a 2.7% decline that had investors scurrying for the door. The American Christmas was always going to be a tough one; nobody anticipated that tough.

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