The markets are fairly range-bound as we wait for today's main event the ECB rate decision and then ECB President Trichet's press conference at 1330 GMT (0830 ET). The single currency is also drifting, but remains at its highest level since November and continues to look comfortable above 1.3800.

Economic data this morning has been a fairly mixed bag. German retail sales were stronger, growing by 1.4 per cent in January relative to the end of 2010. The final reading of February's Eurozone PMI for the services sector was revised slightly lower to 56.8, down from the initial reading of 57.2, this followed downward revisions for both the German and French services PMI's earlier this morning. Service sector activity is still expanding at a healthy clip in Europe, although growth lost a bit of its shine last month.

In the UK the services sector slowdown was more severe. It fell to 52.6 from 54.5, which suggests only a moderate expansion in the largest section of the UK economy. The manufacturing sector in the UK is firing on all cylinders, however it is less than 10 per cent of GDP, whereas the services sector is nearly 70 per cent. If we see a protracted slowdown in the service sector then growth will be at risk and the economy could slow sharply as we move into the middle of the year. The pound has lost some of its lustre especially against the dollar and it is now below 1.6300 after reaching an 8-month high yesterday. EURGBP is also above0.8500 and is testing the 100-day moving average, a key resistance level, at 0.8515.

The ECB press conference will be key for the markets today and will set the tone for the euro. The ECB is the first major central bank to hold a policy-setting meeting since the oil price spike and it will be interesting to hear how ECB President Trichet will react to the step-up in commodity prices. While we expect Trichet to talk tough on inflation and reiterate that the ECB is vigilant on inflation - which typically precedes a rate hike - we think he will stop short of laying out a path for policy normalization. Growth is still massively imbalanced in the currency bloc, with Germany powering ahead, while peripheral nations are still struggling. Overall growth was a meagre 0.3 per cent in the fourth quarter of 2010 it was reported today, that equates to a fairly average 2 per cent annualised rate.

The ECB has to balance growth fears alongside the inflation risk. It also has to consider the suffering peripheral nations struggling under sovereign debt burdens. Until the EU authorities make a decision on how a monetary union copes with members' problems of a fiscal nature then the onus is on the ECB to keep policy loose. We will learn more at the upcoming EU meetings (this Friday and 11th March). In our view, only if a credible solution to the fiscal crisis is found will the ECB be able to tighten policy in the coming months.

Ben Bernanke finished his testimony to Congress yesterday. He reiterated that rising oil prices were problematic if they feed into other price pressures, but he continued to add that the economy required stimulus, suggesting that QE2 will not be curtailed early. His fairly dovish talk is adding to dollar weakness, and the dollar index is close to its November low.

Elsewhere, the oil price came off after hopes of an end to the Libyan crisis appeared to be premature - Venezuela's Hugo Chavez was rumoured to be brokering the deal. Brent is back at $115 per barrel, with WTI above $101. Some speakers have caused a few waves in the FX markets this morning. Swiss National Bank chairman Jordan said that the risk of deflation had diminished and there was no need to intervene to try and weaken the franc. This supports further Swissie strength and USDCHF remains at record lows below 0.9300.

In Australia, Prime Minister Gillard said that she was worried about the economic effects of a strong Aussie. However, if she was trying to talk down the currency she failed, it remains fairly static after she also added that she was optimistic about the growth outlook and demand from China for Australian natural resources.

Stocks are up slightly again today after small gains were made yesterday. The markets remain jittery and are likely to react to events in the Middle East as they unfold, especially if events in Bahrain heat up. Saudi protests scheduled for next week also threaten to dampen sentiment. However, for now the focus is back on the underlying strength of the developed world economies. The ECB today and non-farm payrolls tomorrow will dominate.

Ahead today, watch out for the Bank of England's Charles Bean who is talking to see if he is likely to be persuaded to join the three hawks on the MPC.

Data watch:
EU Mersch & Rehn speaking
EU ECB Governing Council meeting
12.45 EU ECB Interest rate announcement Last 1.0 Exp 1.0
13.00 UK BOE Deputy Governor Bean Speaking
13.30 US Non - Farm Productivity Last 2.6 Exp 2.3
13.30 US Non - Farm Unit Costs Last -0.6 Exp -0.5
13.30 US Initial Jobless Claims Last 391K Exp 395K
13.30 EU ECB Press conference - Trichet speaking
15.00 US ISM Non - Manufacturing Last 59.4 Exp 59.3
16.00 US Kocherlakota Speaking on Labour markets and monetary policy
17.15 US Lockhart speaking on the Economy and labour

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