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Once again an EU ministers summit has flattered to deceive and no resolution or guiding mandate was reached; whether it was about Portugal or not. Further procrastination on this issue must start acting as a negative soon and events such as Angela Merkel’s battering in the latest German election may be the catalyst that euro bears need.

Merkel’s CDU was trounced in two regional elections this weekend, and more damaging was that it was in the heartland of the party’s base. Pressure has also been put on the euro this morning by rumours that the new Irish government wishes to impose haircuts on senior holders of its debt and that the country’s banks, or what is left of them, will fail the upcoming stress tests revealing a multi-billion euro short fall. After a dip in Asian trade the euro has crawled back this morning as concerns over Libya and Japan exist and risky assets remain weak.

GBP has slipped versus the dollar in Asian trade this morning as dovish comments from Adam Posen, the MPC member pushing for further QE, point to inflation BELOW target come mid 2012. He is looking for a figure of 1.5% in 15 months time which seems rather optimistic. We believe sterling has also slipped as a result of the riots over the weekend. While 98% of the march was peaceful and passed off without event scenes of people smashing bank store fronts breeds uncertainty for a currency and the combination of both these factors sees the pound below 1.60 against the dollar for the first time in 10 days.

Interest rate differentials will remain the key driver of FX over the week with the USD firming on Friday as a result of some bullish chat from Philadelphia Fed Chairman Chuck Plosser. He said that the retail, business and job environments have recovered enough to withdraw the monetary policy support coming from further injections of cash. This has moved the dollar index off the 15 month lows it saw last week but weakness remains.

The data calendar is quiet today although risk remains in today’s US inflation figures at 13.30.

Latest exchange rates at time of writing