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The big mover of the day was the pound after some better than expected labour market data and a surprise change in stance from one of the Bank of England's most noted doves. Adam Posen's shift towards the majority (i.e., the fence) from voting for more stimuli at the March meeting seemed to have the most impact on the market as it dramatically reduces the prospect of more QE in the near-term. It wasn't that long ago that the UK was expected to get more QE next month, those plans seem to have been shelved for now.

The tone of the minutes was fairly upbeat compared to previous months. The Bank noted that funding conditions for the financial sector picked up strongly, and banks in the UK could issue healthy levels of debt in the public markets, suggesting they were less reliant on central bank liquidity. The Bank also nodded to the recent uptick in the PMI surveys for March for both the manufacturing and services sectors. However, not everything is smooth sailing for the UK economy. The Bank's challenges in setting monetary policy include downside risks to the near-term projection for GDP combined with upside news for the near-term path for inflation. The Bank admitted that elevated inflation could be more persistent than the Committee projected in its February Inflation Report and achieving its 2% inflation goal could be harder than it first thought. Added to this the BOE is still concerned about the Eurozone. It said that even if the worst risks did not crystallise the process of rebalancing was likely to act as a persistent drag on the euro-area periphery.

The minutes made clear that most members are in wait-and-see mode and only David Miles believed that the balance of risks continued to warrant an expansion of the asset purchase programme this month. Interestingly, the minutes noted that Miles' decision was finely balanced suggesting that the only outright dove at the BOE could also be losing his resolve.

The economic data also surprised on the upside. Unemployment fell by 35,000 in the December to February period, the first drop since last spring, and the unemployment rate fell to 8.3% from 8.4% - the lowest level since last summer. However, it's far too soon to say that the UK's labour market is in good shape, the claimant count rose by 3,600 in March, which was below expectations but has pushed the overall number of people claiming jobless benefits to 1.61 million. This is bad news for the UK's fiscal consolidation efforts as it is trying to reduce its enormous welfare bill. Thus, the labour market data and the BOE minutes seem to suggest the same thing: a slight improvement in the UK economy, which means that immediate stimulus is not necessary, however a cautious approach is warranted going forward.

Market Moves


The pound bulls jumped on the more hawkish sentiment in the BOE minutes. EURGBP was the chief casualty, which fell through the 0.8200 barrier with ease. We need to get a daily close below here to confirm this move, but the fundamental back-drop suggests another leg lower could be on the cards for this pair, with 0.8160 then 0.8090 (the low from June 2010) the next support levels of note. Obviously tomorrow's long-term Spanish debt auction is key for the euro. A weak auction could weigh heavily on EURGBP. Today's data from the UK is pound positive versus the euro, and this has been confirmed by the bond spread - the UK-German 10-year bond spread has jumped 150 basis points in the last two weeks.  The spread is approaching near-term resistance, and if it can get above here then it may signal another leg lower in EURGBP.

EURUSD has been hit by the move lower in EURGBP - it is currently testing support at 1.3070. There is a lot of support between where we are now and 1.30 including 1.3056 - the bottom of the Ichimoku cloud - and then 1.3030 - the H&S neckline. We are range-trading right now, with the top side capped at 1.32. We believe that the results of tomorrow's Spanish bond auction and the first round of French Presidential elections could be the breaking points for EURUSD. Anything considered a bad result could weigh heavily on the euro and cause it to test that key 1.30 support level.

We have had more upside earnings surprises out of the US; however, stocks are coming off fairly sharply today reversing some recent gains. We argue that there isn't much of a fundamental basis for the move lower in stocks, and suggest it could be positioning prior to the Spanish debt auction tomorrow morning. Even Spanish bond yields are retreating. The 10-year yield is now below 5.8%, although we would note that the 10-year yield is falling faster than the 2-year yield, and if we continue to see this flattening in the Spanish yield curve that could cause further risk aversion. It's not a concern right now, but it is definitely worth watching.

The other thing to note is that the Swiss National Bank's interim head Jordan may be appointed formal President of the SNB as soon as today. If that happens then it could signal to the market the SNB is committed to maintaining its 1.20 EURCHF peg, which could ease downward pressure on this cross. Also, rumours that BOC governor Carney could take over from Mervyn King at the helm of the Bank of England when he steps down next year are being denied today. Carney will deliver the BOC's Monetary Policy Report at 1530BST today, which could weigh further on USDCAD, which fell below parity yesterday. The next support of note is 0.9850.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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