A news report citing unnamed ECB officials said the central bank is preparing to reduce borrowing costs if backed up by sufficiently weak data out of the area, boosted prices especially at the shorter dated end of the curve.

Some sections of the market are now starting to bet on the possibility of a rate reduction in September.

Last week, strong comments from European Central Bank officials ruling out a rate cut in the euro zone, hit bond prices hard. Officially, there has been no change from this stance but ECB chief Jean-Claude Trichet gets his chance to set the record straight this week. Trichet is scheduled to give speeches twice this week

Additionally, in what is set to be a quiet week data and event-wise, the focus may well fall on the Swedish interest rate decision today where a rate cut may materialise

On the currency front, the euro stayed on the back foot on mounting concerns about the prospect of political deadlock at the EU following the failure of the latest meeting of the heads of government to agree a budget

The EU summit descended into acrimony on Friday night when British PM Tony Blair held firm against French-led demands for a reduction in the 3 bln Pound “cheque britannique”

The UK government has said it will veto any bid to cut its 3 bln Pound rebate without a reform of farming subsidies, which the French refuse to discuss

Over in the UK meanwhile, gilts were also lower tracking their European counterpart

The UK data came in on the weak side, with government finances much worse than expected. Official figures revealed that PSBR stood at 8.7 bln Pound in May, higher than the 7.0 bln in the same month in 2004 and well above expectations of a 7.2 bln deficit. The figure is the highest monthly level since comparable records began in April 1993

Meanwhile, survey data from the likes of the British Banking Association and Council of Mortgage Lenders continued to show that the UK housing market is stabilising and not likely to crash.