London Open Update: Risk tries to end the week on a high

Don't forget that you can now follow Forex.com's research team on Twitter: http://twitter.com/forexresearch

It's been a watershed week for asset markets. Global central banks have stood shoulder-to shoulder to keep liquidity pumping into the stressed European banking sector. Risk love nothing more than a liquidity injection and is now set for its biggest weekly gain for 3-years. However, the Bank of England is much more cautious. Its Financial Stability report released yesterday was mostly doom and gloom. The banking sector's fortunes have deteriorated sharply since the last report in June, and as a result it warned that mortgage rates could surge and a credit crunch is among us.

So even though the Bank of England Governor is telling everyone to batten down the hatches, risk is having a field day. Stocks in European markets have opened higher again today as the bulls try to make it the biggest winning streak for 3-years. After what has been a tough summer this "rally" couldn't come at a better time as people try to jump on this "trend" and boost their full-year results.

Themes: The chief theme in the market right now is optimism. Optimism that the European leaders will follow the central banks and take bold action to solve Europe's debt crisis and optimism that the US jobs report will be strong giving risk another excuse to rally into the week-end.

The consensus is for a +125k reading for Non-Farm Payrolls and the evidence so far looks good. The 4-week moving average of weekly jobless claims have fallen to the 395k mark in the last 2 weeks, the ADP private payrolls report was an enormous 206k (enormous by recent standards) and the employment sector of the manufacturing ISM report was also in expansion territory in November, although it had moderated to 51.8 from 53.5 in October. Temporary Holiday workers could boost today's number although that may not be enough to bring down the stubborn unemployment rate from 9%. So today's labour market report from the US could be a bit of a mixed bag. Expect volatility, but if payrolls come in roughly in-line with expectations then we may drift into the weekend. A strong number tends to cause risk to rally and the dollar to sell off, while a weak number

causes a bout of risk aversion. The market has Europe on its mind, but it respects payrolls so be nimble and expect sharp moves after 1330 GMT.

There have been tonnes of headlines out of Europe: Merkel making her strongest call yet for fiscal unity in the lead-up to next week's EU summit. She ruled out Eurobonds and the ECB taking a central role, saying that the ECB is fundamentally different from the Fed and the BOE - in other words it is not a printing press. She spelled it out: this is a marathon and the solution to this crisis will not be forthcoming. Talk about managing expectations prior to next week.

There was much more positive news from Christine Lagarde, the head of the IMF, who said that the G20 could commit more resources to the IMF if needed.

Elsewhere, my favourite story of the day is the 10-days of secret planning by central banks in the lead up to Wednesday's big liquidity bazooka. The failed German bond auction last week caused the Fed to agree to cheapen dollar funding for the next 14 months, after it had resisted previous calls. Efforts were led by the BOE, who certainly sounded worried about current conditions when it announced its Financial Stability report yesterday. However, officials continue to deny that the funding measures were spurred by the imminent collapse of a large European lender...

Some other interesting stories are emerging such as the capital race between banks and sovereigns next year, which both have to raise sizable chunks of cash.

Problems remain but sentiment has picked up and that is what drives markets in the short-term. This is reflected in the 100-pip drop in the Italian bond yield which is below the crucial 7% level and is currently trading at 6.44%. Next week's ECB bond-buying data will be scrutinised to see if they have helped bring yields down, but since banks buy lots of sovereign debt, the liquidity push to unblock bank funding channels may have also eased pressure on the Eurozone bond market.

Best Regards,

Kathleen Brooks| Research Director UK EMEA | FOREX.com

d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e: kbrooks@forex.com| w: www.forex.com/uk

23 College Hill | 3rd Floor | London EC4R 2RT

Now you can follow us on Twitter: http://twitter.com/forexresearch

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Services Authority (FSA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan.