EUR/USD has drifted lower from its 1.5000 overnight high aided by comments from the ECB's Trichet and a weaker tone in stock markets.  The move back to USD1.500 wiped out any evidence of the fact that Fed Chairman Bernanke broke with convention yesterday to make mention of the USD.  Bernanke's acknowledgement of the headwinds that face the economy will continue to warrant low rates for an extended period effectively snuffed out any support for the USD.  

Despite their failure to support the USD, ECB's President Trichet this morning attempted to gain leverage from Bernanke's remarks on the USD referring to them as very important.  Trichet also reiterated that the EUR was not designed to be a reserve currency.  This is a statement of fact and a repeat of previously made comments.  The timing of Trichet's comments is interesting given the fact that the market has given up hope that Obama's trip to China will bring a quick revaluation of the China.  The pegging of the CNY to the USD means that the EUR, along with the JPY, is bearing the brunt of USD weakness.  If China is not going to allow the CNY to feel some of the pressure of USD weakness soon, then it is likely that the Eurozone's effective exchange will move back to its all time highs.    Thus, without an adjustment in Chinese exchange rate policy, the ECB may have little option but to increase jawboning to try and stem the pace of the EUR's gains vs the USD.  Obama did make mention today of China's past statement of commitment to move towards a more market-oriented exchange rate over time.  However, this theme was not picked up by President Hu Jintao. 

Sterling made impressive gains early on following upbeat comments overnight from the MPC's Sentance on the UK economy.  Cable rose as high at USD1.6870 and EUR/USD finally took out the 0.8900/10 key technical support.  The gains, however, have failed to sustain given the better tone of the USD.   Cable has fallen back to 1.6810 and EUR/USD is holding above 0.8850.  Sentance's upbeat remarks centred on recent survey data from which he drew the conclusion that the recovery is getting underway.  While UK data has been light this week, the 13.3% y/y increase in John Lewis weekly sales in the week to Nov 7 is encouraging recovery hopes.  Sentance's comments add weight to market hopes that the Q3 GDP data (-0.4% q/q) will be revised higher in time.  The first revision is due on Nov 25.  UK CPI data this morning registered a stronger than expected 1.5% y/y.  The move higher in near-term inflation is consistent with the warnings from the BoE which suggest that CPI could move sharply higher near-term in response to higher energy prices and the phasing out of the temporary reduction in VAT on Jan 1.  While CPI may print a figure as high at 3% y/y in early 2010, the Bank maintain the view that medium-term inflation will remain suppressed by excess capacity.  In short, today's higher CPI data do not alter the view that BoE rates will be on hold for some time yet. 

Despite a spike to an AUD/USD 0.94000 high overnight, the AUD had been trending lower following the release of the minutes of the Nov MPC  which included the phrase that further gradual adjustment in the cash rate would most likely be appropriate over time.  This encouraged the view that having already hiked rates twice this quarter that interest rates could be on hold until February. 

US PPI today will likely be overshadowed by Oct production data.  ABC consumer conf. is also due.  

Jane Foley