The EUR has been taking a decidedly nonchalant view on the EMU crisis this year; the assumption that monetary union will stay the course has become the overwhelming view. The convergence of a number of negative EMU related events this week, however, should question the confidence of the FX market. EMU is not yet out of the woods and the EUR could yet suffer another bout of pressure.

Negative news from Portugal, Spain Germany and Finland is not the most constructive start to today's EU summit. This meeting was supposed to sign off the development of the EFSF. Instead it seems probable that this will have to be delayed.

Finland has been dragging its heels with respect to agreeing to increase its funding into the bolstered EFSF ahead of its national elections next month and Germany now wants a longer period to raise its contributions.

Meanwhile this morning's announcement by Moody's on Spain is likely to dust off previous fears over whether it too may eventually require some financial assistance; Spanish bond spreads vs. Bunds have been wavering this morning following the announcement.

News that Moody's has downgraded by one or more notch the senior debt and deposit ratings of 30 banks follows heightened speculation of a move overnight. Today's report follows Moody's downgrade of Spain's sovereign rating on March 10.

Since of the principal reasons for the sovereign ratings downgrade was related to expectations that the eventual cost of bank restructuring will exceed the government's assumptions, it is not a huge surprise that the banks have been targeted by Moody's. Also, the impact of the news will be countered by the fact that the ratings of Spain's largest and well diversified banks (Santander, BBVA and La Caixa) have been untouched.

That said, it now look very likely that Portugal will to be forced to request an EU bailout once it has picked its way through its political crisis. This could step up speculative pressure on the Spanish bond market. Every time funding costs lurch higher, the likelihood of a bail-out increase.

In its present stance, it is possible that the EFSF could cope with a bailout of Spain on top of Portugal and Ireland, but the coffers would then likely be dry. A bolstered EFSF is essential to guard against all eventualities that the present EMU crisis may throw at it. Yet it seems that EU Leaders will fail to deliver this, at least for the time being. Conversion line at EUR/USD1.4052.

Sterling - retail sales the next focus

Unsurprisingly the budget provided little direction for sterling yesterday. The Chancellor attempted to talk up sentiment but there is no avoiding the fact that the economy is about to suffer a huge amount of austerity next month.

The minutes of the March MPC indicted that many members would like to see the impact of these measures before raising rates. There was no step up in hawkishness in these minutes relative to February and this cements our view that the BoE could yet wait until Q4 to hike rates.

Today's retail sales data are expected to be weak and could hammer home this view. Sterling still vulnerable on rallies vs. the EUR.

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