EUR/USD is consolidating its position following yesterday's late fall. That said, levels of anxiety in the market are very high; EUR/USD is close to its recent low, the VIX index is hovering just below its intraday high, in line with levels traded in the spring 2009 and Libor continues to trend higher. The decision by the German Regulator to ban (until March 2011) naked short positions on European government bonds, credit default swaps and the share of the top ten banks and insurers has created additional uncertainty for the markets.

News of the German Regulator's ban triggered an immediate sell off of the EUR based on the assumption that selling the EUR was the only way to hedge European exposures. Insofar as it is only naked short-selling that is banned, this assumption is overdone. That said the decision does imply that speculators may increasingly focus their attention on the foreign exchange market suggesting that EUR volatility could increase as a result of this decision. In view of the EUR's recent pounding the timing of this decision may appear surprising. This implies the timing of the announcement may be politically motivated and designed to win back some credibility for the German government following its unpopular decision to potentially plough EUR 123 bln into the European Stability Fund. The German parliament is due to vote on this on Friday amidst clear popular opposition. Politicians continue to accuse speculators of damaging the credibility of EMU; the market remains of the view that it was irresponsible fiscal policies that has brought about the crisis. Of particular note in Merkel's speech this morning were her words that ''orderly insolvencies of states must be studied''. This falls short of an endorsement of debt restructuring. However, it does suggest that she is considering that the EMU framework may have to be revised to take account of this possibility; this move would likely buy her political support at home. If Germany does not back the EU/IMF's EUR 750 bln Fund and signal that it is prepared to sign up for ongoing support for the less competitive EMU nations, then default/restructuring in Greece would become very likely. The hurdles ahead of EMU remain significant and EUR/USD looks set to trade lower to its long-term average of USD1.18 within a 3 mth view and potentially lower.

The minutes of the BoE meeting showed a 9-0 vote in favour of no change to QE. This is no real surprise. Last week's dovish comments by Governor King made clear that he still saw significant hurdles ahead for the UK economy. Certainly, the anticipated fiscal squeeze will be painful. King dovish position last week implied that the door to further QE was still well and truly open. That said, yesterday news of a spike higher in CPI to 3.7% y/y and the resultant accusations that the Bank has for months consistently under-estimated inflation in the UK will ensure that there is little further risk of QE at this point. While news of fiscal skeleton's in Labour's cupboard have not been encouraging EUR/GBP remains essentially range driven, though the bias remains lower on the daily charts. Key support lies at GBP84.00.

AUD/USD has fallen heavily this morning on the back of a sharp fall in the May Westpac consumer confidence index. Fear that global growth prospects could be impacted as the market pares back risk appetite is also heavily affecting commodities prices and the AUD. On the heels of this week's dovish indications contained in the RBA's May minutes, it seems increasingly likely that there will be no further rates hikes in Australia for at least the next two policy meetings. That said the drop in AUD/EUR may provide buying opportunities.

US CPI is likely to remain benign in Apr. FOMC minutes are also due.