FX markets remained range bound through the Asian session as events in the MENA and impending ECB meeting have keep large traders sidelined for now. Asian regional indices were mildly higher despite the disturbing news that Libya basically broke out in civil war and foreign government are discussion contingencies. The mild move higher will be a slight breath of fresh air today as equity markets have been selling off the past few days due to the instability in the Middle East and North Africa.

Yesterday's economic news was good for risk appetite with the highlights being UK manufacturing PMI and US ADP. The EURUSD was range bound between 1.3850 to 1.3875 until a weaker-than-expected PMI figure caused the currency pair to drop. Oil prices remain comfortable at elevated levels with WTI crude at $102 and Brent safely back above $115.00.

Fed Chairman Ben Bernanke had offered a frank assessment before Congress of the proposed $60bn spending cut. The chairman asserted that the economic recovery would be slowed and that cuts would add roughly 200,000 to the unemployed. With comments like that splashed across US media, it will be difficult to get the US beast of fiscal irresponsibility under control. Bernanke did reiterate his stance that the Fed would act, if necessary, in managing inflation. However, Bernanke seems to be wallowing in denial with comments about benign inflation while the just-released beige book reveal mounting price pressures across the US and especially in manufacturing.

The Beige book stated that overall economic activity continued to expand at a modest to moderate pace in January and early February and manufacturers and retailers across many districts reported that they were passing through higher input costs to customers or planned to do so in the near future. Sounds like inflation pressure are clearly lurking.

Interestingly, the US got some good news as China announced it will lower restrictions on the CNY being used for cross board transactions. Chinese officials suggested that they would assist foreign treasuries in adding CNY to their FX reserves. This means that the CNY should appreciate faster and provide some relief to the mounting global imbalance. A trade imbalance which theoretically hurts US growth the most.

This morning, there is a compelling article in the China Securities Journal which predicts that the Reserve requirement will be increased very shortly for Chinese banks. The journal cited the Central Bank buying 501.6 billion CNY from commercial banks.

As for today's trading, the main focus of the day will be the ECB meeting and subsequent press conference. For the rate decision, most suspect this will remain a nonevent with policy rates staying unchanged at 1.00%. We agree.

The recent string of decent economic data and strong PPI reading should cement a hawkish Trichet. However, with the rate market already aggressively pricing in a rate hike of nearly 80 basis points by 2012, the rhetoric need to be strong as to not disappoint. We suspect Trichet will most likely ease back slightly on the hawkish verbiage as weakness in the European banking sector and lingering sovereign credit concerns will cause Trichet to pull back expectations. We are expecting a slight pullback in EURUSD before heading higher tomorrow ahead of critical US Non-Farm Payrolls.
Forex-Chart