Events unfolding in the Middle East, while extraordinary, have yet to generate a noticeable effect on FX pricing. In Bahrain, the establishment has made it crystal clear that protest will not be tolerated. Today's scheduled day of rage quickly turned into a battle zone as tear gas was used on protestors in the capital Manama and reports that tanks were also heading to protest sites suggests that peaceful expression of political discontent would not be accepted. Yesterday's ominous report that Iran was sending two naval ships through the Suez Canal into the Mediterranean caused some safe haven flow (USD and CHF the main beneficiaries), but reports today suggest that the crossing was postponed and no reschedule date was mentioned, which helped ease growing tensions. G10 FX markets have been range-bound with the cable bouncing between 1.6050 and 1.6150 while the EURUSD has eased slightly from this morning's 1.3609 high down to 1.3540. We suspect that unless events in the Middle East escalate significantly participants will fade headline causing safe-haven trades, and remain focused on the anticipated EU comprehensive agreement and US economic data.

Meanwhile, the roller coaster ride continues for sterling traders. BoE Governor King verbally watered down theories of an early rate hike in his comments yesterday, stating some people are running ahead of themselves - a comment that triggered a broad GBP sell-off. He then added that any notion that the BoE might hike to anchor the public's growing inflation expectations was misplaced, saying the BoE is not in the business of futile gestures. However, today the MPC's ultra-hawk Sentence went on the offensive. Sentence stated that it was most unlikely that UK inflation will quickly ease and that he sees danger that higher inflation and inflation expectations will become embedded. He proposed that in order to defend against these rapidly rising threats, the BoE would need faster and bigger rate hikes then the market had expected. The comments from Sentence echo our own views, and we suspect that members will begin leaning towards tightening in the near term. While the less than hawkish minutes and comments from King caused sterling longs to unwind, we still see dips as good buying opportunities.

Yesterday, the FOMC minutes sounded slightly optimistic, suggesting that downside risks have receded slightly. The minutes stated that assessment of the most likely outcomes for economic activity and inflation over the projection period was not greatly changed. Fed members modestly lowered their unemployment and inflation forecasts (as expected) while keeping growth expectations unchanged. Overall there was nothing new in the report and will certainly not derail the current round of QE.

On a final note, the CHF has been appreciating nicely against the EUR and USD in recent days. We see a few reasons for this sudden change in direction. Firstly, in our view the CHF is now the currency most reactive to risk aversion, and while the overall FX market has not flooded other safe haven trades such has USD and JPY, events in the Middle East have provided a gentle flow of highly risk sensitive buyers into the Franc. Another reason is that recent comments by the SNB's Hildebrand has reminded traders that current monetary policy in Switzerland is very loose and given growth forecasts, rates will need to increase this year. Finally, concern over the EU's comprehensive solution has increased in recent days (supported by widening of peripheral vs. German yield spreads & rising CDS prices) triggering capital crossing the board. Today's US CPI will provide the data highlight, but otherwise expect FX to drift within current ranges.