Fundamentals have clearly taken the back seat to fable mongering and inflated headlines this morning. The hot-cold risk-appetite trades have picked up a schizophrenia-like pattern and Forex has yet to develop a sustainable trend across any major pair. We are still seeing a level of divergence between treasuries, stocks and commodities which hasn't assisted in providing some much needed clarity.

With the anxiety surrounding yesterday's EU data, the market braced itself for an end-of-days scenario only to quickly breathe a sigh of relief. Irish and Spanish debt auctions went off without a hitch with rates only slightly higher than prior auctions. The USD broadly sold off as a result and sovereign EU spreads had already begun to tighten before the auctions concluded but the good news aided the rebound. The positive news from two PIIGS was able to offset the negative German ZEW figure which came in significantly lower than expected. The indicator which measures investor confidence in the Germany economy fell 7.2 points to 14.0, coming in 6 points below consensus.

Risk seekers have decided not to trade through the Asian session and pundits were quick to point their collective finger at 2-tier soft US Housing Starts and home building permit data. In an interesting turn of events, Minneapolis Fed President Kocherlakota stated that the FOMC decision to reinvest the proceeds of maturing MBSs (mortgage-backed securities) into Treasuries and not use the proceeds to write down their balance sheet was motivated by the need to limit mortgage prepayment risk and was not a reflection of the Fed view on the recovery. He then went on to say that speculation by economists surrounding the Feds motivations were unwarranted, and that there is no new information about the current state of the economy to be learned from the FOMC's actions or its statement. Either way, it's naïve for the Fed to ask markets not to read into their actions and the clarification is a too little, too late.

Rhetoric continues to stream out from Japanese policy makers, but each statement has a lesser impact on the market than the previous. The dwindling effect led DPJ lawmaker Kaneko to demand FX intervention but recognize that without a coalition, any action by Japan would have only limited effect. He further asserted that intervention is necessary to show that the government cannot and will not accept the current level. If Japans policy makers are truly interested in moving the JPY, verbal intervention has all but exhausted its utility. It's time to move onto BoJ-driven solutions if they want results.

Today's economic calendar will be a light summer day with the only data byte of interest being the BoE's MPC minutes being published. EU construction will be released as well, but will be a non-market mover. For the BoE minutes, the market is broadly anticipating an 8-1 vote keeping policy unchanged. Andrew Sentance is expected to be the lone dissenter, again. The inflation report kind of took the wind out of today's minutes by downgrading their the BoE's previous growth forecast and suggesting that they were only slightly concerned with inflation levels.

The sterling has been under pressure this morning as traders are anticipating that today's minutes may indicate the a further QE measures by the central bank. Given the Fed's shift to diet QE, it's logical to suspect the BoE may go in the same direction. We are short GBPUSD for the day.


Today's Key Issues (time in GMT):
08:30 GBP BoE MPC minutes, vote Aug 8-1 exp, 7-1 prior
09:00 EUR Construction output % m/m (y/y) -1.0 (-6.3)