The minutes from the latest Bank of England meeting confirmed that the Bank has shifted to a more dovish stance in recent weeks. All members of the committee voted to keep rates on hold, the first unanimous decision by the MPC since October 2010 after Spencer Dale and Martin Weale changed their stance.

The minutes noted the stressed financial market conditions at the start of August; it also reiterated the Bank's view on the outlook for growth that "after some slowing in the near term, a gradual recovery in the pace of (UK) activity was expected over the medium term." The Bank also said it expected inflation to rise to a peak of 5% due to temporary factors like increases in utility bills and energy prices, but "the Committee's central view remained that inflation was likely to fall back in the medium-term."

The MPC still considers that the greatest risks to the UK economy come from the euro-area through exports, interlinkages within the finance and banking sectors and the global financial turmoil that could arise from a disorderly default of a Eurozone member. Although the BOE has shifted to a more dovish stance, the minutes noted that "the case was not yet strong enough" for more QE to jump-start growth, but that further asset purchases might be necessary if more downside risks materialise - such as another flare up in the Eurozone debt crisis.

Overall the minutes confirmed that rates in the UK are likely to remain low for some time. However, it didn't tell us anything new and the BOE will only act with more QE if things deteriorate in the wider economy. Thus the Bank is in wait and see mode. Although growth is not stellar, it is still chugging along, but the BOE is more worried about developments outside its realm of control. Although sterling immediately nose-dived, it recovered once investors digested the fact that QE is back on the table but may not be deployed unless the global economic situation deteriorates rapidly.

The UK's latest unemployment report for June was not pleasant reading. The unemployment rate jumped to 7.9% from 7.7% in the three months to June, and unemployment claims rose at their fastest pace in more than two years. Jobless claims rose by 37.1k last month, up from 24.5k increase in June. This is worrying since growth is slowing at the same time as the government is embarking on its fiscal consolidation programme. The added cost of unemployment benefits may weigh on the public finances going forward. Global investors' focus remains on debt levels and realistic fiscal consolidation plans. The government may well find itself between a rock and a hard place: continue to make cuts while growth deteriorates, or slow down fiscal restraint and risk losing the UK's triple A credit rating. This is likely to keep sterling subdued in the near-term, although we think it should remain stable versus the dollar around the 1.6400-1.6500 zone.

In Europe, the euro has shrugged off the Merkel/ Sarkozy press conference yesterday. The most worrying announcement for the markets was when Sarkozy said that the size of the EFSF fund would not be enlarged. This suggests that Europe's politicians have pushed the onus onto the ECB to continue to prop up the Italian and Spanish bond markets. However the muted reaction in the FX markets suggests 1, that investors don't believe Sarkozy and think the EFSF will eventually be enlarged and 2, that there was no real expectation that Merkel or Sarkozy would pull anything as radical as Eurobonds out of the hat (they couldn't do it even if they wanted to, as that would need to be agreed by all members). So the euro is back within its recent range between 1.4350 and 1.4450.

However, stocks have reacted badly to news there may be a financial transaction tax, after France and Germany announced they would propose such a tax at the next EU meeting in September. European equity markets are slightly lower so far this morning. Financial centres all over the globe must be on tenterhooks today since if Europe announces a tax then it could open the floodgates with the UK and US following suit.

The Swiss franc was the big mover of the day when the SNB announced further measures to weaken the "overvalued" franc. However, this had the opposite effect of what was desired and the Swissie has had a wild morning. After trading as high as 1.1550, EURCHF fell to 1.1225 before settling back above 1.1300. Expectations had been building that the SNB would announce plans to peg the Swissie to the euro or introduce a currency floor. These did not materialise today, but we would urge caution as the SNB seems to be determined to weaken the Swissie and more radical measures could be introduced in the future. However, since the SNB's attempts so far have failed perhaps the Bank should consider intervening in Europe's bond markets to try and boost the euro....

Ahead today fundamentals take centre stage as US producer price data should give a good indication of price pressures in the economy, which may determine if QE3 will be forthcoming or not.

Data Watch:
13.30BST (0830 ET) US PPI m/m 0.1% exp, yoy 7% exp
13.30BST (0830 ET) US Core PPI m/m 0.2% exp, yoy 2.3% exp
18.20BST (1320ET) US Fisher speaking on Fed Functions and monetary policy
00.50BST (1950 ET) JP Trade Balance Last 70.7BN (YEN) Exp 69.3

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Kathleen Brooks| Research Director UK EMEA |

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