LONDON (SHARECAST) - The single currency has pulled back from its 4 month lows after Japan followed China in pledging to buy euro zone bonds in an effort to show solidarity and support the European Financial Stability Fund (EFSF). While this may help liquidity in the short term for European debt and drive bond yields down a little it is unlikely to make any difference with respect to the problems within in Europe and probably only serve to delay the inevitable. Until such times as European leaders grasp the fact that some form of restructuring is necessary the euro will continue to remain under pressure. In any case Greek borrowing costs rose to record levels yesterday, and Portuguese 10 year bond yields remain around 7%, while Belgium is also getting dragged into the crisis with its 10 year yields touching their highest post euro levels ever, due to political deadlock for the past 7 months as politicians squabble amongst themselves about forming a government. The European Central Bank has also taken some of the sting out of the current euro weakness by buying 5 and 10 year Portuguese bonds on the secondary market as well as Greek and Irish bonds, and this has pulled the single currency away from its recent lows around 1.2865. In an episode reminiscent of Groundhog Day, a la Greece and Ireland, whispers are abounding that Germany and France are pressing Portugal to accept a bailout, though this has been denied by all sides, which probably means that it’s only a matter of time, if previous history is anything to go by. However with Portugal, Spain and Italy looking to raise over $40bn this week rising bond yields threaten to push the crisis into its next phase, with the first of this weeks auctions on Wednesday, and culminating on Thursday, just prior to the European Central Banks monthly meeting and press conference. The press conference by Trichet could well be extremely illuminating, especially if the auctions get covered at close to the current high market rates. The pound had a rather mixed day yesterday sliding back slightly against a basket of currencies after the strong gains of recent days, helped on its way by a worse than expected decline in house prices in December, reported by the Halifax, which showed prices declined 1.3% against an expectation of 0.4%. The BRC sales monitor for December also disappointed overnight confirming the difficult snow affected Christmas trading period coming in at -0.3%, down from a rise of 0.7% in November. However with no other economic data of note until Wednesday, sentiment is likely to be driven by events in Europe, and the peripheral bond markets. EURUSD – the single currency appears to have found a bit of a base around the 1.2865 area and the subsequent rebound looks to be finding some resistance around the previous lows at 1.2965. The 1.2795 61.8% Fibonacci level of the 1.1880/1.4280 up move remains the last obstacle to a steeper fall towards 1.2550 and the August 2010 lows. These old lows at 1.2960/70 should act as intraday resistance while a break above that could see some spill over to further resistance around 1.3080 at the 200 day MA, while a close back above could well presage a short squeeze back towards 1.3180 initially. GBPUSD – as we suspected it might the short squeezes in sterling continue to frustrate the bears while the 200 day MA just below 1.5430 continues to prevent further sharp declines. A sustained move below 1.5400 is needed to open up the 1.5265 area which remains the key longer term target and this level is the 50% retracement of the up move from the May 2010 lows at 1.4230 to the 1.6300 highs. Having broken above Fridays highs at 1.5570/80, the pound needs to overcome trend line resistance around the 1.5640/50 area, which can be drawn down from the 1.6300 highs. Only a push through 1.5715 38.2% retracement of the down move from the 1.6300 highs to the 1.5350 lows would target 1.5820. EURGBP – the single currency could well find some buying interest around the 0.8275 area which is 76.4% retracement of the 0.8065/0.8940 up move though so any pullbacks would need to overcome resistance around the 0.8330 area, to prompt a deeper rally towards the larger resistance area around the 0.8400 break out level. Any overspills should be capped by the 200 day MA at 0.8485/90. In the longer term the expectation is for a revisit of last years lows at 0.8065. USDJPY – the dollar continues to frustrate to the upside after yesterday’s failure to overcome the 83.70 area, as US bond yields drift back on safe haven buying of US treasuries at the expense of European bonds. Last nights close below the 50 day MA at 82.80/85 continues to frustrate the bulls and as such we could see the dollar slip back lower again towards the lower end of its recent range towards the 81.90 area. Despite these falls lower the emphasis remains for a test towards 85.80, the 38.2% retracement of the 95.00/80.25 down move. However we need to overcome the 83.70 resistance as well as the December highs at 84.40/50.

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