We have seen a large slump in USD/JPY, when the BOJ intervened to halt its strengthening currency. It was the largest increase in the USD/JPY (2.8%) since last September, when the BOJ last intervened. After the intervention, the BOJ boosted its asset buying scheme, they increased the size of their asset buying program to 15 trillion yen ($195 billion), which is a rise of 5 billion.

Further, this can be seen as a reasonable increase and combined with the yen selling; we would expect to see this result in a weaker yen throughout the trading session. Today is the third time that the BOJ has intervened in a year; however in the current economic environment it will be hard to thwart positive sentiment to safe havens.

There will be debate about the timing of this intervention. However, after the SNB lowered its target for three month LIBOR to just above zero, the yen ran the risk of being the solo gainer, so the timing can be somewhat justified by the BOJ.

Central Bank meetings will dominate the agenda in the European session. The Bank of England will announce interest rates at 1200 BST. The market expects the Bank to keep rates on hold today as the economy shows signs of faltering. The minutes from the meeting due later this month will be much more interesting to see if any member of the MPC is getting closer to supporting another round of monetary stimulus to boost flagging growth.

The ECB is the main event, especially Trichet's press conference. A report in a UK newspaper article suggests that the ECB may announce it is stepping up its bond buying programme in response to the recent pressure on Italian and Spanish bond yields. After spiking to dangerously high levels yesterday they have since come off in response to the news the ECB may start buying Italian and Spanish debt. The bank has been out of the market for 18 week. The ECB is stepping into the markets until the various member states vote to accept the recent changes to the EU's EFSF rescue fund. Once this is done the EUR440bn fund will be able to enter the markets. The ECB has said it didn't want to intervene, however the severity of the situation has caused it to take action. Combined with the intervention from both the SNB and the BOJ, it has been a busy 24 hours for central bankers.

Italy's PM Berlusconi stated that more had to be done to boost domestic growth in a speech yesterday; however we doubt this affected Italian yields. The credit markets know that the EU has to work as a unit to sort out the fiscal mess, and until the EFSF is enlarged, possibly even doubled, we think that pressure on bond yields will remain.

The euro continues to trade in a range between 1.4250 and 1.4350, it jumped 100 points after the report about the ECB, and we think that has already been priced into the market. If the ECB sounds hawkish today then there is a chance the euro may weaken as the markets focus returns to the growth outlook and higher rates may thwart the EZ economy. Although retail sales were higher in June led by Germany, the outlook will weaken if borrowing costs continue to rise. However, now that contagion is spreading to Spain and Italy the ECB may choose to limit rate hikes as the sovereign crisis threatens to disrupt the global financial system.

EURCHF continues to recover after yesterday's SNB intervention. However even though the SNB lowered rates and flooded the market with liquidity it will need sustained action to stand a chance at reversing market sentiment towards the Swissie. It could also do with the global outlook stabilising, which would naturally reduce demand for safe havens. Gold continues to trade around $1,665 record highs.

The New Zealand Finance Minister also spoke out about the strength of the Kiwi overnight; however, he said it was up to the RBNZ to dictate intervention policy. The NZD has fallen sharply in the past week along with other risky assets; however it remains 22% higher versus the dollar than a year ago.

Risk appetite has improved, with stocks higher as Italian bond yields fall.

Data Watch:
UK 12:00 BoE Asset Purchase Target GBP bn 200 200 200
UK 12:00 BoE Announces Rates % 0.50% 0.50% 0.50%
Euro Area 12:45 ECB Announces Interest Rates % 1.50% 1.50% 1.50%
Euro Area 13:30 ECB's Trichet Speaks
United States 13:30 Initial Jobless Claims (Jul-30) lvl 400K 398K 405K

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Best Regards,

Kathleen Brooks| Research Director UK EMEA | FOREX.com
d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e: kbrooks@forex.com| w: www.forex.com/uk
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