The dollar rose on Monday following further delays in Greek debt talks and concerns the country would not qualify for the 130bn bailout needed to meet its March refinancing deadline. The focus of negotiations shifted to painful austerity reforms which the troika of the IMF, ECB and E.U require before releasing the bailout money. These include reforms to minimum wage, working conditons, cuts to public sector jobs and pensions. The coalition government was reluctant to agree to the measures on Monday leading to fears of a default. The dollar also strengthened after a surprise rise in Non-Farm payrolls on Friday led to a reduction in the likelihood the U.S needing further quantitative easing (QE) and U.S yield outlook improved as consequence dampening pro-yen and yield currency demand. Commentary from Federal Reserve's Bullard was slightly hawkish if anything as he was critical of overly low interest rates as 'punishing savers' and optimistic about emplopyment which he thought would improve to 8.0% by the end of the year.

   The euro weakened after Greek debt talks stalled on key issues surrounding conditions required by the troika for the release of further bailout funds - and as the deadline approaches for the next tranche of refinancing in March - increased fears of a possible default and domino affect. This time it was the Greek government which opposed certain very severe austerity measures such as major cuts to public sector jobs, reforms of the minimum wage and reforms to pensions. Risk appetite was also harmed by IMF revising down from 9.0% to 8.25% its GDP forecast for China in 2012. There was further pressure form figures which showed debt as a percentage of GDP in Q3 2011 worsened for most euro-zone countries. Greece's ratio spiked to 159.0% from 138.8% a year earlier; the average across the total euro-zone increased to 87.4% versus 83.2% previously; Portugal's increased by a worrying 18.9% to 110.1%; Ireland's rose by 16.0% to 104.9%; Italy's, however, was just 0.5% higher at 119.6% and marginally lower than the second quarter figure.

   The pound traded mixed on Monday after a general rise in risk aversion following further delays to Greek bailout talks although losses were limited because of sterling's safe-haven role and the 'least ugly' effect. A run of successful PMI releases last week also supported the pound as it resurected hopes the U.K economy might successfully duck a technical recession and avoid an increase in QE , widely expected to be announced by the BOE at their next rate decision meeting on Thursday. More QE was seen as inevitable towards the end of 2011 as data showed a slowdown in the economy, however, sicne then the outlook has improved. Trading my remain subdued in the days running up to Thursday as investors stand aside until the decision is announced. Monday's data showed Halifax House Prices (3mo) in Jaunary moderated, falling by -1.8%, which was not as severe as the -2.1% fall expected, although it was deeper than the -1.3% previous print and showed continued systemic weakness in one of the U.K's major economic sectors.

    The yen traded mixed on Monday with the rally in the dollar/yen grinding to a halt after the effects of expectation-breating U.S jobs data wore off and the yen returned to strengthening overall as uncertainty remained the dominant characteristic of global financial markets. The IMF's downward revision of Chinese growth forecasts in 2012 from 9.0% to 8.25% also may have encouraged some risk aversion as it gave tangible evidence of investor concerns that the slow-down in the west was now affecting emerging economies. However, the major concerns came from Europe as usual, with Greece debt woes still dragging as negotiators failed to reach an agreement for the 130bn bailout plan to go ahead and the spectre of default once again loomed. On the data front Monday was light although Tuesday will see the release of quite a lot of data for Japan, including Leading Index for December, which is expected to show a rise to 93.8 and the Trade Balance which is expected to show a surplus of 625.3bn yen and could help the currency rebound a little if those expectations are successfully met.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst