Comments from the BoE Governor King suggesting that the BoE will reflect on lowering the rate for commercial banks deposits at the BoE pushed the pound through the floor this morning.  Ahead of these remarks a weaker than expected reading from the ZEW injected life into the USD and into what had started as a fairly directionless morning.  A mixed performance in stock markets overnight had left the fx market with no strong direction.  Neither EUR/USD nor EUR/JPY were trading very far from last night's close ahead of the ZEW posting, but both leapt lower on the release.  The ZEW is a survey of financial market sentiment.   The fact that both the readings for the current situation and economic sentiment were weaker than expected may imply that the degree of scepticism in the market over the sustainability of recent rallies in risk could be significant.   Speculation that the rise in stocks, oil and high yielding currencies such as the AUD may be overdone relative to the improvement in the real global economy has been doing the rounds for weeks, but higher stocks and the leg up last week in EUR/USD suggests that risk appetite has continued to build.   In contrast, the fall in the ZEW may be heralding a pullback in risk is on the cards. 

While cable moved lower on the release of the ZEW and tumbled on the comments from King, the pound had found support earlier in the session on the release of the stronger than expected UK August CPI release and from a firm reading from the RICS house price index .  Once again inflation in the UK failed to fall as much as expected.  CPI registered 1.6% y/y compared with a median expectation of 1.4%.  Comments from BoE Governor King this morning referred to the outlook for inflation in the UK as volatile.  King maintains the view that inflation will fall below the 1% target in the months ahead before moving higher into the new year.  On the margin, the continued relative stickiness of price pressures in the UK strengthens the view that when the BoE starts to tighten policy next year that the pace could be more aggressive than that of the ECB (Eurozone inflation is currently -0.2% y/y).  This should support the medium-term outlook for GBP vs the EUR.  Near-term, however, speculation that the BoE may lower the rate for commercial bank deposits could undermine the pound into the Oct BoE policy meeting.  Risks associated with the UK's poor fiscal position also continue to weigh on the pound though some clarity on the Labour government's fiscal position may be presented today at PM Brown's speech to the Trade Union Conference.   EUR/GBP reached a low of around 0.8780 around the CPI release but surged back to 0.8840 before hitting some resistance. Cable has seen a low just above the USD1.6500 this morning. 

The Chinese Vice Foreign Minister He Yafei continued the criticism of the US's tyre tariff overnight ensuring this topic remains in the headlines in the approach to the G-20 meeting next week.  Chinese officials also repeated the pledge to continue with expansionary policies.

US retail sales data will likely be centre stage this afternoon.  US PPI, empire manufacturing, business inventories and ABC consumer confidence are also scheduled while Fed Chairman Bernanke is due to speak.