The euro pushed higher in the European session ahead of a meeting between Angela Merkel and Nicolas Sarkozy. The leaders are due to meet in Berlin today, with a joint press conference scheduled for 07.30 EST. While previous meetings between the leaders have provided details of future policy, we do not expect any new information from today’s meeting. Nonetheless, the risk of market-moving headlines is still there and, in a context of extreme positioning, investors are cautious of being caught short. We may get some new initiatives aimed at boosting growth in the Eurozone, although the main aim of the meeting is to iron out differences ahead of the EU Summit on January 30. In the Asian session, EURUSD fell to a new 15-month low of 1.2666 but then traded as high as 1.2786 in Europe. USDJPY traded in a range 77.03-76.77. Risk appetite was rather subdued elsewhere however, and equity markets in Europe were slightly down at the time of writing. In a break from tradition, the dollar rallied on Friday’s strong payrolls numbers. We see this as a very significant structural shift in FX markets − the dollar is no longer a currency that gains on risk aversion. Strong US economic data lowers the risk of the Fed embarking on another round of easing, at a time when the ECB’s balance sheet is still expanding to new highs. Additionally, our European economics team expects the ECB to cut the refi rate by another 25bp later this week, taking it below 1.0% for the first time. Atlanta Fed President Lockhart is due to deliver his first speech since becoming a voting FOMC member a week ago. Public remarks late last year indicate he is ‘sceptical’ on the need for further asset purchases.
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