Risk appetite has suffered further setbacks in the past day on fears of China is clamping down on lending, Barack Obama's proposals to freeze US spending, and this morning's downgrade of Japan's outlook to 'negative' by S&P ratings agency. Despite the latter development, JPY is higher on the day as the arguments for broader risk aversion are overpowering the logic that Japan's economy may struggle over the medium term. Overnight, the BoJ kept interest rates on hold at the ultra-low level of 0.10% and Governor Shirakawa affirmed the stance that monetary policy would be kept very easy despite forecasting that deflation would be milder than previously anticipated. Nevertheless, Finance Minister Kan was later quoted as saying he felt the BoJ could be doing more to fight deflation, and if the current wave of risk aversion abates as we believe it will, there appears to be plenty of political, fiscal and economic uncertainty facing Japan to be negative on the currency in the medium term. Meanwhile the main data event of the morning has been UK Advance GDP for Q4; GBPUSD had been grinding higher since the start of the week as analysts expected a 0.4% QoQ expansion would emphatically confirm the UK's emergence from recession in the last quarter of 2009. The reading ultimately disappointed; 0.1% QoQ growth (-3.2% YoY) was much lower than consensus and only barely positive. However, the reading did confirm the UK's technical recovery from recession, and represented the first expansion since Q1 2008. It is also worth bearing in mind that this is a very early estimate and UK GDP figures do have the tendency to be revised higher in subsequent readings. GBP has subsequently sold off (down 0.7% on the day at the time of writing) to lows of 1.6122; but should meet 4-week uptrend support around 1.6120. This afternoon's release of US Consumer Confidence is expected to improve to 53.5 from last month's 52.9 print; but given the sheer weight of uncertainty in the market with tomorrow's FOMC meeting - and indeed further details on the Obama bank overhaul yet to come - risk appetite is, in our view, likely to struggle. This should lend itself to USD strength, and indeed JPY strength in the short term.

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