Sterling traded rather stable in recent days as upbeat UK inflation figures and EU credit woes shifted selling pressure to the Euro. The cable bottomed around 1.553 against the Dollar and settled around 0.87 against the Euro. Although the Sterling has been rather exposed to selling pressures not so long ago the recent elevated figures spurred investors bets that UK inflation could crawl in faster than anticipated and bring tightening closer. The CPI figures published this week stud at 3.5% YoY a 1.5% above the BoE target and higher than investors’ consensus. In fact this is the second CPI figure in a row that majorly outpaces the expectations of both policy makers and investors alike. The BoE governor Marvin King in his letter to the government laid inflation prospects as subdued stressing that UK industrial over capacity will curb inflation towards the mid of 2010.The Governor reiterated that risk for the UK economy remains to the downside and did not rule out additional quantitative easing to support the economy in case of another deterioration but most importantly sealed his reference to  inflation by stressing that in case mid-long term inflation prospect will rise above the BoE target of 2% the committee will move to tighten monetary conditions.

The Japanese Yen is currently hovering around the 90 level against the Dollar after several days of decline. At the beginning of the month the Japanese currency dipped below the 90 level as fears over economic stability loomed, however as more signs of recovery from Japan began to emerge downside momentum eased and the Yen retreated to a flat gain for the month. At the beginning of the week the Japanese GDP published surprised for the better gaining 4.6% annualized and 0.9% QoQ for Q4. The surprising factors which contributed to the GDP rise was Capital spending which rose for the first time since 2008 and domestic demand which contributed 0.6% to the rise in GDP. The Figures raised hopes among investors that Japan can have a recovery led by domestic demand. Nevertheless the one main issue of the Japanese economy continues to loom, Deflation. Japan is effectively in a deflation spiral for 2 decades since the “lost decade” back in the 90s and since the current credit crisis has erupted deflationary pressures weigh heavily on the economy. The GDP deflator the strongest measurement of inflation in Japan fell -3% for the year signaling falling prices in the land of the rising sun continue to weigh on the economy and squeeze profit margins for Japanese companies.

There was a slight divergence in riskier assets last week as the US equity markets where able to rebound from their recent large selloff, while the Euro was punished for the lack of action by European countries. Commodities found ground and were able to rebound slightly, as both the petroleum complex and gold were able to attract some investor interest.

The markets started the week on the defensive side as the prior week’s selloffs continued to weigh on investors’ minds.  In addition, the U.K came into focus on Monday as market participants were forced to absorb weekend news that was not favorable to the sterling. There are now two major things that are weighing on the: Politics and economics. The risks of a hung parliament have been highlighted in the latest polls, and have spooked market participants. One must note, under the US presidential system, a divided government is sometimes seen as a positive development in terms of checks and balances.  This does not hold in a parliamentary system where a hung parliament spells policy paralysis and confusion.

Euro Dollar trade is currently steady at the 1.37-1.38$ range ahead of the EU conference which will take place today. Market focus on EU events will be rather intensive as EU members are expected to try and conclude an emergency funding package to Greece. Although the woes over the Greek swelling debt problem are flouting around for some time, several weeks ago investors focus over the issue has taken a dangerous twist with spreads and Yields over Greek sovereign debt spinning out of control hammering the Euro vigorously against the Dollar and the Yen. Fears over the Greek debt issue have eased a bit in recent days but nervousness is still very much present. Today at the EU convention investors will be eager to see if the EU will be able to sort out a solution for the Greek issue. Yesterday talks have resulted with no decision placing pressure on the Euro and today’s session is considered crucial. The Eurozone has a few members with a swelling debt problem besides Greece among them Portugal, Spain and Ireland. Therefore investors see the upcoming convention as an indicator wither the Eurozone as a whole can reign in on the deficit problem and bring its growing deficit back on curse. A failure might spur fears that the EU is having problem to control deficits and with markets extra-sensitive to risk this could result in another downturn in the Euro debt story with the Euro under pressure and EU members such as Greece Spain and Portugal having difficulty in future funding.