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The FX market is taking its cue from the weaker dollar overnight and GBPUSD and EURUSD are both trading well. The main events so far today have been weaker construction output from the Eurozone, a mixed Spanish debt auction and hawkish comments from Bank of England member Andrew Sentance. Stocks are fairly flat, and risk appetite does not seem to be dented too much by news of political protests across the Middle East and reports that Iranian ships were planning to enter the Mediterranean Sea, fuelling fears of an Iranian/ Israeli stand-off.

The pound has reversed most of yesterday's decline after Bank of England governor Mervyn King dampened the chances of a near-term rate hike during yesterday's Inflation Report. While the market may have reacted to King's fairly dovish comments yesterday, today it was reminded that his is only one view on the Monetary Policy Committee. Andrew Sentance, the arch-hawk (or Axel Weber of the BOE) reiterated his view that rates should rise to combat inflationary pressure. He added that a yield-fuelled appreciation of sterling would help moderate import price pressures, and thus a stronger pound is not negative for the UK economy. The pound bounced after his comments in London and is currently above 1.6100. It is worth noting that Andrew Sentance leaves the MPC in May and his replacement is yet to be announced. Thus, in the absence of a replacement who shares his views, come May the Bank will have lost the most hawkish element of the MPC.

Although rate hike expectations moderated yesterday, they only did so marginally, and there is still a steep rate profile for the UK for the rest of this year. This should support the pound for as long as the BOE appears like it will be the first of the major central bankers to raise rates.

The Fed minutes from the last meeting were pretty much as expected. Looking ahead, the minutes suggest that when the second round of quantitative easing expires in June that will be it for stimulus from the Fed. However, Bernanke and co have shifted their rhetoric regarding weakness in the labour market. They are now talking about job creation in the US, which remains dismal, rather than the unemployment rate, which has started to improve. So, the focus will remain on monthly payrolls data for now.

The Fed also revised up their expectations of growth this year to 3.9 per cent, which is stronger than that for the UK and for Europe, which should be supportive of the greenback. However, until the market can be sure the Fed won't extend QE later this year on the back of poor jobs growth the dollar is likely to remain lacklustre.

In Europe the Spanish long-term debt auction was the highlight. The outcome was fairly mixed. Although the interest rate Madrid had to pay was lower, demand for the bonds didn't meet the EUR 2bn that had been anticipated. The market reacted by selling Spanish bonds causing yields to rise. Due to Spain's large debt issuance schedule for the rest of this year, any drop off in demand is a worry for the fourth largest economy in the Eurozone. So far this piece of bad news has only affected the credit markets hence Spanish bond yields have risen, but it hasn't caused too much damage to the single currency and it remains fairly flat on the day.

Ahead today US CPI data and Fed speakers including Ben Bernanke will dominate the action.
13.30 US CPI 0.5 M/M 1.5 Y/Y Exp 0.3 M/M 1.6 Y/Y
13.30 US Core CPI Last 0.1 M/M 0.8 Y/Y Exp 0.1 M/M 0.9 Y/Y
13.30 US Initial Claims Last 383K Exp 400K
13.30 CD Wholesale sales Last 1.2, exp 0.9
15.00 US Geithner speaking
15.00 US Philli Fed Last 19.3 Exp 21.0
15.00 US Leading Indicators Last 1.0 Exp 0.1
15.00 US Bernanke speaking
15.00 EU Flash consumer confidence index Last -11.2 Exp -11.0
15.30 CD BOC Quarterly review
16.30 US Lockhart speaking
17.00 NO Gjedrem & Olsen Speaking
18.10 US Fisher speaking on the Federal reserve functions and an update of the economy
18.20 US Evans (FOMC Voter) Speaking on the US Economy
20.30 US Hoenig speaking

Best Regards,
Kathleen Brooks| Research Director UK EMEA |
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