London Session

Having made sharp gains on the back of Swine Flu fears both the USD and the JPY are currently holding off their strongest levels. EUR/USD tested the water below the 1.300 level in early London trading, USD/JPY traded as low as 95.63, though with stock market indices notching up further substantial losses across the board, risk is that safe haven assets will remain well bid. A break of the EUR/USD 1.300 level is likely to target a move towards the 1.2930 area, while a move in the yen back to its daily low at USD95.63 is likely. The stronger USD triggered another sharp slump in gold prices in Asian trading. Having plunged below USD900 gold ran into some buying interest though failed to break back above $900.

The spread of the Swine virus over the next few days will be a crucial determinate of how heavy the economic impact of this crisis will eventually be. Meanwhile the threat of a pandemic and the risk that this could prolong the global downturn is overshadowing economic data. This morning's better than expected French consumer confidence data (-41), stronger than expected April Italian business confidence and a rise in UK retail sales reported in the CBI's distributive trades survey all follow the recent theme that the severity of the downturn has been easing. Also, initial April inflation estimates from the German Lander are suggesting inflation could be higher than expected there. This will add extra interest in the discussions at next week's ECB meeting. Germany's BBK Chief Weber has been forecasting that inflation in Germany will turn negative this year and while the market is expecting a further rate reduction next week and the introduction of some form of quantitative easing, there are signs of some divergence in views at the ECB as to how low rates should go.

The release of US consumer confidence data today will be of interest. An improvement here will increase the risk that the Fed this week describes the economy as stabilising. In ordinary circumstances this would lessen the demand for safe haven assets including the USD. However, the developments of Swine Flu look set to dominate market direction over the coming sessions.