The rally following Germany’s approval of changes to the EFSF bailout fund proved to be short-lived. Even though the outcome of the vote was not particularly unexpected, political worries were reduced by the fact that Chancellor Merkel gained support from within her coalition. Markets were also helped by a bigger than expected drop in last weeks US jobless claims but this also failed to provide a durable impact.

The point is that there is still an enormous degree of uncertainty on the ability of policymakers to resolve the crisis in the eurozone periphery while growth worries have not gone away. Even the approved changed to the EFSF bailout fund are increasingly being seen as old news given the view that it will need deeper changes including ‘leveraging’ it up.

As a result risk aversion remains at an elevated level and is showing no sign of easing. It may be tricky to turn sentiment around as we go into the final quarter of the year, particularly as those investors registering profits for the year may want to capitalise on these profits rather than sit through continued volatility in the weeks ahead. Indeed the sharp drop in gold prices over the last couple of weeks even in an environment of elevated risk aversion may reflect this.

Likewise risk assets may struggle to recover over coming weeks unless there is a major development in the situation in Europe or in growth data. Markets this week will be looking to key events including an Ecofin meeting, a European Central Bank (ECB) meeting and the Non-farm payroll in the US.

Today there will be plenty of attention on the Ecofin meeting of European Finance Ministers particularly that much of the reason for the stability in markets recently is the hope of concrete measures to resolve the crisis in the region. In this respect the scope for disappointment is high, suggesting that the EUR is vulnerable to a further drop.

While the extent of short market positioning at last week left open some scope for EUR short covering the absence of any good news will mean the momentum for short covering diminishes. Unless the Ecofin meeting delivers on expectations EUR/USD will likely re-test the 26 September low around 1.33.