The US and the UK will dominate the markets today. The State of the Union address in Capitol Hill was slightly disappointing after there was mention of incentives for multinationals to repatriate overseas earnings back to the US and plans to cut the deficit were lacking in detail. This caused some weakness in the dollar overnight, which has continued into the European session. EURUSD is currently trading at 1.3700, and GBPUSD has broken above the 1.5800 level on the back of the MPC minutes.

The UK is grabbing the limelight yet again after the release of the minutes from the January MPC meeting this morning. The minutes showed that 2 members voted for a rate increase, previously it had only been one lone hawk Andrew Sentance who had wanted to tighten policy. The minutes also noted that the Committee had discussed monetary stimulus withdrawn due to consumer price pressures. This is fuelling sterling strength and we are seeing a reversal of some of yesterday's short positions.

However, even with more members wanting to tighten policy, the chances of it happening anytime soon are low in our opinion. The GDP print for Q4 was poor and growth is contracting even before austerity measures really start to bite. The MPC would not have known this at their last meeting, which makes next month's MPC meeting more interesting from a market perspective. Added to this, in a speech last night MPC governor Mervyn King seemed in no hurry to raise interest rates, and highlighted the tough period ahead for the UK economy. The bottom line is that the MPC has to plug the growth gaps during the upcoming period of fiscal readjustment, and this requires loose monetary policy.

Later on tonight the Federal Reserve meeting is likely to dominate, however we don't expect it to change very much from last month. The statement released after the meeting at 1915GMT is likely to highlight the improvement in economic data, but while the Fed tethers monetary policy to the outlook for employment then it will continue to remain committed to QE2 and to keeping interest rates low. The 10-year Treasury yield is still stuck in a range, which suggests that the dollar will get moved around with developments in the euro and sterling for the time being.

Elsewhere, in Germany the import price index continued to rise strongly at the end of last year. Import prices are up 12 per cent on an annualised basis, which adds to the dilemma facing the ECB - to hike rates based on inflation pressures building in Germany, or to keep rates loose to help the weaker peripheral nations. New Zealand's central bank meets later at 2000GMT. It is expected to keep rates on hold at 3 per cent, after some mixed economic data.

Global stocks are rising today, and US futures are likely to follow suit. A dovish-sounding FOMC this evening could fuel further gains in global risk assets, including commodities and stocks while weighing on the greenback. It may also boost gold. The precious metal has declined nearly $100 since the start of the year, but has started the European session on a positive note.

In FX markets, if the euro can sustain gains above 1.3700 then we could see back to the 1.4000 level, the 200-week moving average and also a formidable level of resistance. The swift turnaround in sterling post the MPC minutes suggests that the market has been wrong-footed. In GBPUSD 1.5775 seems to be good support, with 1.5890 in view ahead of 1.5930 - the 200-hour moving average. However, the decline in the sterling swap rate, although it has moderated somewhat this morning, suggests that GBPUSD could fall back to the 1.5500 level once the market reassesses the MPC's intensions to keep rates low to help growth during the austerity period facing the UK economy. But after getting oversold very quickly yesterday, the pound is due a pullback so we wouldn't be surprised to see a bit more strength in GBP crosses this afternoon.

Data watch:
13.00 GMT (0800 ET) NO Norges Bank Interest rate announcement Last 2% Exp 2%
16.00 GMT (1100 ET) EU Stark speaking at Kiel University
19.15 GMT (1415 ET) US FOMC Interest rate decision Last 0.00-0.25 Exp 0.00 - 0.25
20.00 GMT (1500 ET) NZ Interest rate announcement Last 3 Exp 3
23.50 GMT (1850 ET) JP Trade Surplus Last 161.1 Bio Yen Exp 423.4 Bio

Best Regards,

Kathleen Brooks| Research Director UK EMEA |
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