FX markets continue to search for drivers but so far have failed, leaving price action to wander aimlessly. EURUSD backed off the 1.3747 (5-day high) while USD continued its march higher to 82.79. The Chinese CNY fix captured the market's attention as the surprise rate hike illustrated that PBoC was determined to head off inflation pressures and nip any growing asset bubbles in the bud. There was increasing speculation that officials would utilize the CNY appreciation to ease growing price pressure. However, the fix clearly shows that the Chinese are not in any hurry, as the USDCNY was reported merely 1 pip lower to 6.5849. The lack of commitment left markets confused and Asian regional indexes were mixed (although Shanghai was sharply higher up 1.59%).

AUDUSD fell sharply after a knee jerk move up to 1.0142 despite employment figures increasing to 24k vs. 17.5 exp. Hidden in the underlying data was the fact that the extra growth was from part-time employment while full-time actually dropping 8k. We still suspect that economic activity in Australia will continue to improve, despite temporary setbacks, and the markets is positioned too dovish for an RBA that will need to hike three times in 2011.

The fate of the USD remains very uncertain as the prospects for recovery in the US remain questionable. Bernanke's contentious testimony (thanks to Paul Ryan's interesting questions) before the House Budget Committee was cautiously optimistic. Bernanke specifically stated that notable declines in the unemployment rate in December and January, together with improvement in indicators of job openings and firms' hiring plans, do provide some grounds for optimism on the employment front. However, he limited expectations by saying, it will be several years before the unemployment rate has returned to a more normal level. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established. Overall his comments were similarly to those from Feb 3rd and failed to provide any earth shattering revelations (we didn't really expect any).

In Switzerland today CPI, printed at -0.4 % m/m vs -0.1% exp, +0.3% y/y vs 0.5% exp. While the rhetoric around deflations has decreased, these weak numbers will surely stir up further FX intervention theories (which we suspect are just that...stories). We suspect that CHF will continue to be on the back foot and that the risk premium developed over the EU sovereign crisis will unwind. The likelihood that the SNB will go into a tightening mood any time soon is unlikely.

Today's non-event highlight will be the BoE rate announcement. Let's get the boring bit out of the way first; it is almost certain that this week's BoE meeting will lack any change in rates (currently at 0.50%) or the asset purchase target (GBP200bn). As such, there's unlikely to be any accompanying statement for traders or commentators to digest. Nevertheless, UK interest rate projections have been given a massive shake-up in the past few weeks; UK CPI surged to 3.7% Y/Y in December according to the latest readings - adding fuel to the fire for UK hawks, and indeed prompting MPC member Martin Weale to join Andrew Sentence in voting for a hike of 25bps at the last BoE meeting.

However, it is worth noting that Weale's vote for a hike was cast a couple of weeks before the ghastly preliminary GDP figures were released (revealing a shock -0.5% Q/Q contraction in the UK economy in Q4). For now, we can only speculate whether Weale would have still voted for a hike had this GDP number been known, but we will all have to wait until the release of the meeting's minutes on 23 Feb to find out those juicy details.

In our view, the Q4 GDP number is probably an anomaly caused by overly pessimistic modeling of the year end cold snap - and will be looking for both upward revisions in subsequent readings as well as a strong bounce back in Q1 GDP data. We still find it hard to fathom how MPC member Adam Posen can keep voting for a GBP 50bn increase in the asset purchase target given the prevailing CPI levels, but either way; expect plenty of growth vs. inflation vs. stagflation debate to keep GBPUSD traders on their toes in the coming months.

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