London Session

There is a sense that after last week's optimism the market will want to lighten long positions ahead of tomorrow's publication of the US banking sector stress tests and ahead of the ECB and the BoE policy meetings. Reports that Bank of America may require an additional USD34 bln of capital and that Citibank will also be required to raise capital have soured hopes that tomorrow's reports on the outcome of the stress reports may not provide many negative surprises.

In light with that tone there has been a modest strengthening of the JPY and the EUR vs. the USD during European hours, though gains have lacked momentum. Sterling saw a sharp spike vs. the EUR on the back of better than expected UK PMI data. The CIPS services PMI rose to 48.7 in April from 45.5 in March confirming the uptrend in the data in evidence since January. This release is consistent with most other surveys in suggesting that while the economy is still contracting, the pace of the downturn has ebbed. A strong rise in the Nationwide Confidence survey in April to 50 from 41 in March also supported sterling although weak house price data from the Halifax showing a worse than expected -1.7% m/m fall in prices in April threw cold water on hopes that the housing market is likely to do much better than bump along the bottom this year. The sharp reaction of the pound to the better PMI, once again highlights a sensitivity likely brought about by heavy short positions. EUR/GBP is poised just above the 0.8825 trendline support, though further UK friendly news will likely be needed to push the pound through this level. Cable looks trapped within a choppy uptrend with support at GBP/USD1. 4935. While the BoE policy meeting is due tomorrow, this is likely to pass without much fanfare. Of greater interest will be the ECB meeting. The market is expecting a 25 bp cut in the refi rate to 1.0%. Key will be whether the ECB announces non-conventional policy measures. The favoured course involves an extension of ECB operations in the interbank market. Uncertainty about the ECB policy announcement tomorrow is likely to leave the market wary of aggressive EUR longs.

The AUD has an interesting session. The release of better than expected March retail sales and trade data were supportive although the more risk adverse mood in Asia has left AUD/USD struggling to hold on to its previous close. The trade surplus was expanding by a hefty fall in imports consistent with the poor domestic backdrop. However, the surprise 2.2% m/m increase in retail sales supports the view that the economy may be stabilising, a view which may allow AUD/USD to hold its choppy uptrend.

Upcoming Economic Data Releases (US Session). Prior, Expected