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The European single currency remained strong yesterday as chatter from the ECB suggested that a rate rise was “almost inevitable”. It had lost ground earlier in the session as various issues from the periphery nations came to light but, as we highlighted yesterday and have done before, rate differentials are the key drivers at the moment.

The weight of expectation on Portugal to take a bailout is reaching the same kind of levels we saw pre-Greece and Ireland. The yields on Portuguese debt rose through record levels throughout the day and it seems that some financial aid will be proposed within a few weeks.

Normally this would trigger a response from the pound to rally however, with the recent data pointing to the UK economy remaining shackled by high inflation and growing at a feeble rate, I doubt sterling could fight its way out of a wet paper bag at the moment. We should receive confirmation today that UK Q4 GDP fell by 0.6% although there are some outlying economists looking for a fall of only 0.3% or 0.5%. If it comes out at -0.6% then we expect it to have little impact on GBP.

While we continue to battle high inflation levels at the moment the US finds itself at the other end of the spectrum. The PCE index, the US version of CPI, remained at 0.2% for the second month in a row stymieing beliefs that monetary policy would shift to something tighter in the coming months. The dollar slipped although the 2 year yield remained up on the day.

We hope to see some euro issues this week as news of the Irish banking sector’s latest round of stress tests is published on Thursday. A further line of credit of anywhere between EUR18bn and EUR25bn is expected to laid out to the banks in order to prevent another liquidity issue. Of the 4 major banks in Ireland, 3 are unable to raise money in the debt markets.

Data, apart from that UK GDP figure is mainly focused on the Eurozone. If inflation in some German states comes in less than expected then we may see those rate increase beliefs tempered somewhat in the near term. We also have US consumer confidence at 15.00.

 Latest exchange rates at time of writing