Today's ECB policy meeting could be the most testing since the institution came into existence in 1999.  BBK Chief and ECB member Weber has been making himself heard over the past few days.  His comments that the threat of contagion from Greece does not merit using every means suggest that there will be resistance to any proposal that the ECB should significantly soften its rules to bail-out Greece.  Prior to the formation of EMU in 1999 the BBK was consistent in its warnings that the rules of fiscal convergence should be enforced very stringently.  It would seem that its fears over inadequate fiscal convergences have been vindicated.  The question now is how far the BBK will bend to support Greece during this crisis.  One of the options for the ECB that is being touted in the market is that the ECB could buy Greek bonds thus providing a guarantee for investors.  It would seem unlikely that Weber would vote in favour of such a move today.  The ECB avoided widescale QE during the height of the financial crisis.  Insofar as buying sovereign debt could blur the line between fiscal and monetary policy and would also blatantly favour one country over another, it is not a policy which would fit easily with the ECB's rule book.   Overall, the market is not expecting the ECB to announce any fresh measures aimed at cooling the Greek crisis today, though President Trichet will be wary of potentially being burned by another u-turn in policy and is consequently likely to keep lots of doors open.

Price action in EUR/CHF this morning has been hugely volatile.  A short-lived surge higher in Asian hours was consistent with a step up in intervention in support of the EUR but EUR/CHF has consequently tanked.  The decline in EUR/CHF should open the way for another leg lower in EUR/USD potentially towards EUR/USD's long term average near the 1.18 region.  Consistent with deteriorating investor confidence, yields on Greek 10 yr bonds have pushed higher to 10.5% this morning.  Portuguese 10 yr yields are around 25 bps higher than their levels 24 hrs ago, Spanish and Irish yields are also higher albeit by a smaller amount.  Spain proved this morning that it can still issue funds on the open market.  However, the average yield on the 5 yr paper stood at 3.532% up from 2.816% earlier in the year.  Today's bid/cover was a respective 2.35%, but the extra cost of issuing the debt will have an impact on the government's deficit cutting targets.   More telling will be market appetite of the next Portuguese bond auction which is planned for the current quarter.  

Yields on 10 gilts are trading just a whisper below yesterday morning's level consistent with the safe-haven status being afforded to the UK debt market despite the UK's fiscal overspend.  Despite the comparison between the present level of Greek and UK debt there is a massive historical difference between the treatment of sovereign debt in the two countries.  The UK government has no relevant history of default; Greek government default is still within living memory.  The UK electorate is today going to the polls under expectations that the general election will yield a hung parliament.  Most recent opinion polls have suggested that the Tory party's lead may have widened.  However, a clear majority would still be a surprise and a likely trigger for a sharp upward squeeze in the pound.  EUR/GBP is today consolidating in the 0.8485 area.  UK PMI services data dropped in Apr to 55.3. Safe haven demand has lent support to the JPY this morning pushing USD/JPY back to the 92.40 region.  The AUD has recovered some lost ground in London hours following a fall overnight on the back of weak data.  Hawkish comments from the RBNZ have lent support to the NZD.  

Canadian building permits data and April PMI are due today.  In the US initial claims and chain store data will be of interest.

 Jane FoleyResearch 207 398 5024