The markets are digesting the news out from Brussels that the Eurogroup meeting of finance ministers’ kicked the can down the road yet again last night and a decision won’t be taken on whether Greece can get its next tranche of bailout funds until November 20th. No wonder European finance chiefs need extra time, they did agree to extend Greece’s fiscal targets by 2 years, however that increases its funding requirements by $40bn between next year and 2017. At this stage it appears that Greece won’t be cut lose and the currency bloc will come up with the money to keep Greece afloat at least until the start of 2013. However, Greece’s fiscal hole is a bit like a bottomless pit and it is hard to see creditor nations like Germany being able to constantly tap tax payers for more money as an election looms for Chancellor Merkel next year.

Greece survives another day

Greece was able to sell some short-term T-bills this morning. It sold EU4 billion at an auction this morning. Greece can sell bills to its banks which are then used as collateral at the ECB. However, this is still EU 1billion less than the EU5 billion payment due at the end of this week.

Investor sentiment weighs on the Dax

Exacerbation with Greece, even if the Prime Minister managed to pass a Budget on Sunday jammed full of cuts he pledged he would not make at June’s election, is reflected in European stock markets, which are down for another day. In the past 4 trading days Germany’s Dax index is down nearly 5%. The index is lower again today after he German ZEW investor confidence index fell even further in November. The current situation index declined to 5.4 from 10.0 in October, while the economic sentiment index fell to -15.7 from -11.5 last month. This is the lowest level since September, and reverses the mini recovery we saw last month. It also supports Mario Draghi’s comments from last week, when he said that Germany’s economy is not immune from the Eurozone crisis. Thus, a further deterioration in the German economy in the coming weeks may boost the prospect of a rate cut at the December ECB meeting, which could keep downward pressure on the euro.

EURUSD: no fundamental drivers to help the recovery

On that note, EURUSD has managed to back away from the 1.2650 lows – the base of the daily Ichimoku cloud and a key resistance zone.
However, we don’t think this is the start of a prolonged recovery for this pair. There are no positive fundamental drivers in this cross to push it higher, thus we believe it has not yet made a meaningful low, and could dip below 1.2650 in the near to medium term. This would be a very bearish development for this cross, and would open the way for a further decline to 1.25.

One to watch: GBPUSD gets boost from stronger CPI

GBPUSD has found its feet today and is one of the strongest performers in the G10 so far this morning. This cross was boosted by stronger than expected inflation data for October. The headline CPI rate, which is looked at by the BOE, rose 0.5% on the month (more than the 0.2% expected), which pushed the annual rate to 2.7% from 2.2% in September. This is the strongest rate of inflation since May. The key driver was university tuition fees; there were also some smaller upward pressures on prices from food and non-alcoholic beverages. There were declines in housing and household services costs and also in recreational costs. The retail price index, excluding mortgage costs rose to 3.2% from 2.6% in September. This makes for uncomfortable reading for the BOE. Tomorrow it presents its last Inflation Report of the year. We expect inflation forecasts to be increased, which may make it difficult for the Bank to do more QE in the near term. The immediate reaction in the pound was a bounce higher. Support held at 1.5850 – the 200-day sma, it has also managed to break above 1.5900 – the base of the daily Ichimoku cloud – on the back of the inflation data. We expect some volatility in the pound over the next 24 hours as we lead up to the Inflation Report. A daily close above 1.59 today could see an extension of this pullback, resistance lies at 1.5955 then at 1.5980 in the near term.

Chart: GBPUSD hourly

GBPUSD