Despite an initial sell off, the EUR has performed well in European hours moving higher across the board in line with the narrowing in the spread of Greek bond yield spreads vs bunds.  Comments from the EU's Alumnia that Greece's plan to cut its budget deficit was ambitious but achievable helped calm market tension, though anxiety has already been soothed by increasing confidence that Eurozone authorities will not allow EMU to be ripped apart from the budget difficulties currently faced by Greece, Portugal Spain and Ireland.    EUR/USD recovered as far as 1.3913 this morning, the USD losing its grip on its overnight gains.  A Weaker Chinese PMI, China's displeasure at the US's USD6.4 bln weapons sale to Taiwan and rumours that the UK's FSA was looking to limit leverage both contributed to the better tone of the USD in Asian hours.  

Sterling has registered dramatic loses this morning.  Cable has plunged to the USD1.5860 level on the back of the move higher in EUR/GBP ahead of the 10 am fixing.   Last week's move below the GBP/USD1.6100 level and today's move below USD1.5900 have both undermined cable from a technical perspective.  Fundamentally, nervousness is building ahead of Thursday's BoE policy meeting.  Last week's disappointing Q4 GDP release (+0.1% q/q) has underpinned the vulnerability of the UK recovery.  While many see this as underpinning the case of in favour of more QE, it can be argued that QE is not the most appropriate policy at this point of the economic upturn.  The weakness of growth in M4 is evidence of the fact that flooding the system with liquidity does not increase the will of the real economy to make use of these funds.  Low short-term interest rates are a more appropriate support for the real economy and the ability of the BoE maintain very low short-term interest rates has already been questioned by the surprising high print in Dec CPI 2.9% y/y.  This was driven by last year's surge in oil, with was arguable driven by the speculative pressures themselves a function of policies such as QE.  In all likelihood the BoE will 'pause' QE this month and sterling should find some support.  Better than expected UK manufacturing PMI this morning should encourage the view that the pace of the manufacturing recovery has stepped up relative to Q4.  

USD/JPY has been creeping higher this morning.  Comment s from BoJ economist that Japan is far from achieving self-sustaining growth are a further reminder of the difficulties faced by Japan's policy-makers and hint that tolerance of a strong yen is likely to run thin this year.  

Tomorrow the RBA is expected to hike interest rates by 25 bps.  However, confidence over this move has been wearing thin.  Given the recent precedent, the RBA is likely to suggest that policy has been returned to more appropriate levels suggesting that a period of steady rates is likely to follow this month's policy meeting.  The RBA will release its Monetary Policy Statement on Friday.  Despite the softer tone in the USD vs the EUR this morning, AUD/USD has found the going tough.   

US personal income and ISM data are due this afternoon.  

Jane Foley