Risk FX remained quiet in opening European trade with most major pairs trading in narrow 20 point ranges as markets awaited the EU summit which begins tomorrow. Ahead of the marquee event fiscal officials from Spain and Germany have tried to manage expectations by staking out their positions.

Spain’s Prime minister Rajoy reiterated that the key issue for Spain today was to be able to finance itself in the international markets. Yesterday Spain saw its cost of funds rise by nearly 200 basis points for 3 and 6 month paper. Mr. Rajoy stated that such dynamics are unsustainable and added further that EU rescue funds should be used to recapitalize banks directly. Mr. Rajoy primary point was that EU needed to work faster in order to resolve these structural problems.

On the other hand Ms. Merkel’s deputy Parliamentary leader Meister stated that shared control must come ahead shared liability reiterating Germany’s position that it will not consider any form of transfer union unless other EU members give up some sovereignty on budgetary and taxation matters.

The central conflict between the need for immediate bailout funds and the necessity for long term structural reform is shaping up as the main story ahead of tomorrow’s EU summit. The euro has remained stationary for most of the early morning trade holding around the 1.2500 level with market players content to sit on the sidelines for now.

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