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In early trading yesterday the euro continued to be heavily sold off as market participants moved to safe haven currencies such as the Swiss franc, Yen and US Dollar.

 The frantic sell off halted at midday when the Italian government successfully auctioned off nearly 7 billion Euros worth of 12 month government bonds. Demand for the bonds surpassed supply by 1.5 – 1 and rumours suggest that China was largely responsible.

 Silvio Berlusconi issued a rallying cry to get behind the Italian economy. He said that “our banks are solid” and appealed for unity ahead of the budget announcement. Opposition leaders pledged their co-operation in passing a 3 year austerity programme. The Italian government hope to have the new measures in place by the weekend, in record timing.

 However, just as the Eurozone took one step forward, Moody’s took two steps back. The credit ratings agency downgraded Ireland’s debt to junk status yesterday evening. In their view, it is likely that Ireland, together with Greece, will need a second bailout.

 The Fed minutes reflected the concerns of Eurozone contagion. The committee’s opinion on the timing of the exit from quantitative easing was shown to be divided. Some members commented that if growth remained slow it would be appropriate for further action in the future. Employment data in the US has been poor of late, with Non-farm payrolls showing that only 18,000 jobs were created in June, adding weight to the QE argument. We saw US stocks rally and the US Dollar weaken on the back of the news.

 UK CPI, a key measure of inflation, came in at 4.2% for June which was well below May’s reading of 4.5%. Earlier this year the Bank of England had forecast inflation would hit 5% before subsiding and this is the first sign of some pull back. The news will take the pressure off MPC members to consider hiking interest rates at the next BoE meeting in August and we saw Sterling weaken slightly on the back of the announcement.

 Chinese GDP came out during the Asian trading session. Despite three interest rate hikes this year, the world’s second largest economy posted an impressive figure of 9.2% for Q2. This was good news for global sentiment as concerns were growing that as China battles inflation, economic growth would have to suffer greater losses.