Gains in EUR/USD accelerated in European hours before EUR buyers emerged at 1.4960. Softer stocks in Japan kept the lid on the risk trade in Asian hours but a better tone in European equities indices has coincided with a softer USD against the EUR, AUD and the NZD.  Sterling has been subjected to a choppy morning.  The pound initially plunged on the back of the release of the Nov MPC minutes.  However, the unit has subsequently recovered.  The softer USD has spurred gold to a high of USD1148.10 /troy ounce this morning.  

The minutes of the Nov BoE meeting showed that further easing is not quite off the agenda yet.  The Bank discussed potentially lowering the bank deposit rate and stated that this may be useful in future.  On the topic of QE, seven of the members voted in favour of the GBP 25 bln extension.  One member voted for no change and one for a larger extension of GBP 40 bln.  While the voting pattern in itself is no indication of any commitment towards increasing QE further, the tone of the minutes was in keeping with the dovish tone of Governor King last week.   The minutes suggested that the committee was concerned over a number of factors which could restrain demand; not least a large fiscal consolidation.  Cable dropped from USD1.6824 ahead of the data to an intraday low of USD1.6758 before bouncing.  It is presently little changed from the London open.  The bounce in EUR/GBP following the data failed at GBP0.8910.  EUR/GBP is still higher on the day but has settled below 0.8890.  The ability of the pound to bounce from its lows can be linked with yesterday's stronger than expected CPI data.  In all likelihood the CPI index will rise to 3.0% y/y early next year. Expectations of higher inflation have led to speculation that the BoE may be forced into hiking sooner than previously expected.   This is unlikely.  The expected rise in CPI can be attributed to base effects linked with the higher petrol and the unwinding of the temporary VAT tax cut on Jan1.  Higher VAT and petrol prices will take money out of consumers' pockets and will not cause the BoE to hike rates early particularly given the Bank's view that excess capacity will suppress inflation medium-term.  On balance, the bias in BoE policy at present it is still tilted towards easing.

AUD/USD has recovered back to the 0.9330 area this morning on the back of the improved appetite for risk.  Australian Q3 wage growth data was in line with expectations but at 3.6% y/y, the rate eased back from 3.8% in Q2 suggesting that the RBA may have scope to hold back from hiking rates again until February.  

President Obama has concluded his trip to China during which President Hu made no mention of the effective CNY peg to the USD.

US CPI data this afternoon should highlight a lack of inflationary pressures. US housing starts are expected to show an improvement.  Canadian CPI is also due.
Jane Foley