The FX market was 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 may not approve the levy and it is trying to find ways to limit the burden on small depositors and also meet the required target in order to get a bailout. According to the spokesman Cypriot President Anastasiades could talk again with Russian President Putin. Against this backdrop, EUR traded in a tight range close to 1.2950. There was a brief spike after German ZEW beat expectations, but intra-day accounts were not prepared to run aggressive positions. Cable also briefly spiked to 1.5135 after CPI rose a notch to 2.8% y/y and PPI unexpectedly jumped.

[EUR, USD]
EUR-USD firmed up after German ZEW strength. Both investor confidence and current conditions improved, which lifted EUR from 1.2925 towards 1.2960. However, gains were limited thereafter as uncertainty surrounding the Cyprus bank deposit levy limited EUR demand. Prices have traded a tight range either side of 1.2950 since yesterday's N.Y. open and this will continue until Cyprus votes on the deposit tax proposals. It is looking likely that depositors up to EUR 20k will be exempt, but according to sources the revised plan could leave Cyprus short of the EUR 5.8 bln needed in order to receive the EUR 10 bln bailout. EUR offers are still in place from 1.2980 to 1.3000, but buyers are still tentatively looking to play the range into 1.2900 and below, while the 200-dma is intact at 1.2970-75.

[USD, JPY]
USD-JPY headed back to the 95.30 region after it topped out just over 95.70 during the Asian session. Exporter hedging capped gains, while EUR-JPY supply has also limited upward momentum and weighed from early Europe. Since the European session got underway USD-JPY has backed away from 95.60 in line with EUR-JPY's pullback from the 124.00 region back to 123.25. USD-JPY could see option expiries influence amid reports of a large European style digital option that is rolling off on Wednesday, which should keep limit movement in theory. Any price chop over the Cyprus bank levy vote may be short lived via the dollar pairing due to this large structure.

[GBP, USD]
Cable ticked up after inflation data, but did not sustain movement due to more outstanding 1.5100 option expiries. CPI rose a notch to 2.8% y/y from 2.7% and input PPI jumped 2.5% y/y, which was much stronger than expected. Cable firmed up from 1.5075 to 1.5135 and then drifted back to 1.5100. On Monday there were more than GBP 1.5 bln worth of 1.5100 maturities and residual short dated interest went through for expiry today. Sterling may see limited movement ahead of tomorrow's BoE minutes and U.K. Budget. We expect the U.K. government to reaffirm its austerity drive, while announcing further "monetary activism. The BoE minutes will reveal if the Bank is any closer to provide further stimulus. Since the last meeting BoE Governor King has talked up GBP, along with other BoE members.

[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 general EUR short covering amid rising expectations that Cyprus may skew the bank deposit levy away from small depositors. Movement in EUR-CHF since the open reflects the holding pattern across the FX majors ahead of the Cyprus parliamentary vote on the bank deposit tax. However, there is evidence that safe haven swissy inflows have dropped off as concerns over eurozone contagion abated after the Eurogroup reaffirmed its commitment to the guarantee on deposits up to EUR 100k. As well as EUR-CHF rising, USD-CHF has also steadied ahead of 0.9450.

[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.