httpvh://www.youtube.com/watch?v=rk6mzPpyOuA

Overnight risky assets across all markets have sold off after German regulators introduced a ban on short-selling of European debt, CDSs and 10 primary banking shares. This saw the euro fall to another 4 year low (1.2144) against the USD and US equity markets slide into the closing bell. European markets were closed at the time of the announcement but will open today in the red.

This is also negative for the GBP as investors may switch from shorting German banks to say, UK banks to express their negativity over exposure to sovereign debt. We saw just how badly the pound did when banks were under the cosh in 2008. While it is only the Germans who have enacted this law so far it could be reciprocated across the EU, a move that would continue to weaken risky assets.

GBP had already been through a turbulent day after the UK’s CPI announcement. The reading was a massive 3.7% compared to the expected 3.5% and traders sold the pound as they became nervous over whether the Bank of England would be forced to hike interest rates before the economic recovery was set in stone. The exchange of letters between Chancellor and Governor put that issue to rest however as Mervyn repeated his ‘Inflation Report’ pledge to allow the recovery time.

The inflation figure is a negative for the pound and should it continue to rise, markets will become increasingly worried.

There is no let up in the publication of fiscal policy that looks set to impact the entire global financial system. We expect the vote on the financial regulatory reform bill within the next 24 hours. Proposals within the bill include splitting banks from their proprietary trading desks, allowing regulators to break up banks that are viewed as too big to fail and forcing OTC derivatives on to regulated exchanges.

These measures would be negative for banks and risky assets including the pound. Should we see a commutation of some of these measures the hit will be less severe.

The Bank of England minutes are likely to be negative for the pound as well today should we see any dissent to the decision to hold interest rates at 0.5% or look for a hike before next year. If there was a dissenter we would expect it to be Tim Besley. The announcement is due at 09.30. Other data includes EU Construction Output (10.00), MBA Mortgage Approvals from the US (12.00) and US CPI (13.30).