Europe will remain under the spot light over the next couple of days with the European Central Bank (ECB) meeting today, alongside debt auctions in Spain and Italy. The speculative market is predominantly short EUR while policy makers, specifically German Chancellor Merkel and French President Sarkozy are making the right noises; it appears the penny has dropped for Eurozone officials that it is not only about austerity but also about growth and reform.

Reports that Fitch ratings are unlikely to downgrade France’s ratings this year has provided a welcome boost to Eurozone confidence. However Greece could yet spoil the party given the continuing dialogue with the Troika to decide the second bailout package for the country. Political resistance within Greece suggests that more austerity may not be easy to execute. For the time being there are ongoing questions about the degree of write-downs that Greek debt will endure. In spite of these issues it looks like investors are becoming more immune to events in the Eurozone. While we still have high bond yields for Italy and other euro sovereigns it seems that risk appetite has improved.

One feature that is providing support to sentiment is the positive news out of the US. Even though the Q4 earnings season has not started particularly well, data releases look rather more positive. Last week’s US December jobs report continued to filter through positives to the market and we have also seen a pick up in small business confidence and a rise in consumer credit. These recent improvements in economic data snaps highlight the gradual recovery process underway in the US and the growing divergence with the Eurozone economy. This supports the view of the USD out performing the EUR in the short to medium term.