The FX market is in a holding pattern pending the outcome on Cyprus' proposed bank levy on deposits. There are signs that Cyprus is working on a watered down plan for small deposits, but it will still have to come up with EUR 5.8 bln under the terms of the EUR 10 bln bailout package. The issue will go to vote at 16:00GMT. However, a government spokesman said parliament will not approve the levy and is trying to find ways to limit the burden on depositors. According to the spokeman Cypriot President Anastasiades could talk again with Russian President Putin. Against this backdrop, EUR is trading in a tight range close to 1.2950 and Cable is limited around 1.5100. The European calendar has German ZEW and U.K. CPI on tap.

[EUR, USD]
EUR-USD traded a relatively narrow range. It edged up towards the 1.2970 area early on, but could not maintain higher levels due to an overhang of offers, which were evident on Monday from 1.2980 to 1.3000. Market sentiment improved overnight amid expectations that Cyprus will water down the levy on bank deposits, but the Eurogroup have maintained that it still needs to raise EUR 5.8 bln. However, it reaffirmed the importance of guaranteeing deposits below EUR 100,000, which allayed fears of contagion in the region. EUR drifted back to the 1.2935, where short term support was noted. Bids are layered towards 1.2920 and into 1.2900 and below. During Monday's deep drop the 200-dma around 1.2870-75 held and will be a major pivot point for near-term direction.

[USD, JPY]
USD-JPY added to yesterday's rebound and firmed up from 95.15 in early Asia to trade at 95.75. New BoJ Governor Kuroda officially starts his role on Wednesday and Monday's sharp drop encouraged fresh long position building amid expectations of more policy easing by early April. There are still some expectations that the BoJ could call an emergency meeting ahead of April 3-4, though policy makers have played down the risk. EUR-JPY also posted a good rally and firmed up from 123.30 to 124.10, but Japanese corporate hedging fuelled profit taking into the European open and it headed back below 123.50. Meanwhile, Japan Finance Minister Aso said that it plans to draw up a 50-day stop-gap budget.

[GBP, USD]
Cable is trading a tight range close to 1.5100 amid more option expiry congestion after maturities in excess of GBP 1.5 bln rolled off on Monday. The GBP downside has also been limited after recent comments from BoE Governor King and other policy makers indicated that further GBP weakness would not be welcomed due to inflationary pressures. GBP should remain in a holding pattern ahead of Wednesday's BoE minutes and the U.K. Budget. We expect the U.K. government to reaffirm its austerity drive, while announcing further "monetary activism," such as an extension of the Funding for Lending Scheme. There is also an outside chance that Chancellor Osborne will tweak the BoE's remit to give it more leeway over the 2% inflation target or adding a growth target, or at least open the issue up for consultation before the arrival of new governor Carney.

[USD, CHF]
EUR-CHF is stable around 1.2250 after it posted a decent rebound on Monday. After it plunged to the 1.2170 area it rebounded back over 1.2250 on EUR-USD short covering and a warning on negative interest rates from SNB's Moser. This is unlikely in our opinion and simply a ploy by Swiss policy makers to head off any heavy pick up in swissy inflows given the recent pick up in eurozone uncertainty. We anticipate selling pressure into 1.2270 today, while buyers are noted from 1.2240 and into 1.2220.

[USD, CAD]
USD-CAD was contained by the 1.0200 to 1.0250 band through most of the session on Monday, and turned back toward 1.0225 after taking a quick look at reported bids into the figure. Trade was very quiet, and this theme continued right into today's European open.