Several ECB Council members made their voices heard overnight on a diverse range of topics. ECB governing council Guy Quaden said policy makers need to correct 'fundamental flaws' in the financial system. This hints at a more global approach to regulation and supervision which he thinks needs to be established. ECB's Constancio joined the recent dollar debate saying that he doesn't think the dollar will fall sharply and adding that, if it did, this could cause substantial problems for the world economy. Nevertheless he noted that some dollar depreciation would be desirable, and that a prolonged period of weak global economic growth could lie ahead. ECB member Bonello sought to address market concerns over possible rampant future inflation, stating that the ECB is already working on an exit strategy out of the unconventional measures undertaken. Meanwhile although ECB's Mersch noted that the Eurozone is not in deflation, yesterday's confirmed CPI reading of 0% suggests that a period of declining prices could be very near. In addition, ECB Governing Council member Weber's comments weighed on the euro, pointing out that the German economy is currently in a "stabilization phase", but added that a significant pickup was "far away". While he anticipates the German economy to stagnate through 2010, he does foresee the US and Asian markets strengthening at a faster pace. These views reinforce our position that the euro is not a suitable vehicle for a growth opportunity.

On Wednesday evening, Governor Mervyn King said that there are signs that the UK economy is beginning to stabilise but it is too soon to reverse the 'extraordinary policy stimulus', while adding that it however was not too early for the BoE to start setting out and explaining its withdrawal strategy. The BoE minutes for the June meeting revealed that the MPC voted unanimously both to keeps Bank rate at 0.5% and to refrain from making any adjustments to the asset purchasing facility. Although £80 bn worth of assets (out of a planned total of £125 bn) have so far been acquired, the committee judged that it is still too early to assess the impact of the program on nominal demand. With less than 2 months remaining in the purchasing program, the comments increase the chance of further extensions in our view, both in time and in scale, which should leave sterling exposed to temporary bouts of weakness ahead. The MPC also noted sterling's continued appreciation, and the reduced inflationary pressures this would bring. Although the jobless total continues to rise, the number of jobless claims only rose by 39K, significantly less than the 60K increase that was feared. The unemployment rate continues to creep upwards, and now stands at 7.2%, although the rate of increase appears to be declining.

Ref: UBS, Chris Lori, Reuters