FX markets traded under the shadow of eurozone uncertainty after Cyprus work on another plan to raise the required EUR 5.8 bln in order to receive a bailout following yesterday's failure to pass the bank deposit levy in parliament. It seems likely that some small despositors will be exempt, but the psychological damage is still likely to trigger significant capital outflow when banks reopen. EUR traded tentatively ahead of more concrete news, but did shown some signs of stability today after it hit new 2013 lows under 1.2850 on Tuesday. Part of its firmer tone was instigated by a sharp sterling short squeeze after the BoE minutes. Specs built up shorts amid speculation of a 5-4 vote, but the BoE voted 6-3 for unchanged policy and MPC members showed increased concern for sterling weakness. Cable rallied out of 1.5030 to 1.5160 highs.

[EUR, USD]
EUR-USD rose on interbank demand, which picked up on the coattails of Cable's upswing. However, uncertainty surrounding Cyprus has limited gains to 1.2930 and a build up of sellers are tipped over 1.2950 and ahead of 1.3000. Appetite to put on EUR positions will remain tentative while the situation is uresolved and market participants are also likely to sit on the sidelines ahead of the FOMC policy statement. A subtle shift in the statement is anticipated, but the pick up in eurozone uncertainty may also enable Bernanke to maintain his dovish credentials, though is still likely to mention the exit strategy.

[USD, JPY]
USD-JPY firmed up from the European open. After recovering the 95.00 level from 94.80 it pushed back to 95.45. Follow through demand from current levels is likely to be limited ahead of the N.Y. options cut due to very large 95.20 strikes and a large European digital structure, which will payout with spot at 95.20 or above. Meanwhile, there was further evidence on Tuesday of long position building under 95.00. The market is anticipating more policy easing and a pick up in JPY puts was notable, with strikes trading up to 98.00 in a two week horizon, while some bets into 100.00 went through from one month out.

[GBP, USD]
Cable rallied after BoE minutes and U.K. employment data. The Bank vote 6-3 to keep QE unchanged, which was as-expected, but there was evidence of short positions being established amid speculation of a 5-4 vote into the release. Cable reached 1.5027 after strong sales from a U.K. clearer and a large U.S. name, which has exacerbated the subsequent rebound back over 1.5130, leaving it firmer from London opening levels around 1.5090. The U.K. claimant count fell 1.5k versus expectations of -5k and compared with a revised -12.5k in January from -10k previously. Meanwhile, there is conjecture that Chancellor Osborne could extend the Funding for Lending Scheme and could also give the BoE great flexibility on policy in order to shore up the growth outlook.

[USD, CHF]
EUR-CHF is trading close to 1.2220 after it rallied in lockstep with EUR-USD, which traded back over 1.2920 amid rising expectations that Cyprus will come up with another plan in order to get a bailout. It has to find EUR 5.8 bln, but could not pass the bank deposit tax and is currently in talks with Russia to provide aid. The majority of the funds deposited at Cyprus banks is believed to be from Russian investors. EUR-CHF should see limited upside until there is more certainty over Cyprus and sellers are expected to cap into 1.2230 and 1.2250. USD-CHF has backed away from 0.9490-00 on a slightly easier dollar tone, but is still meeting tentative buyers from 0.9450 and further support is seen into 0.9420. As well as eurozone issues to contend with there is also the U.S. FOMC policy statement to digest.

[USD, CAD]
USD-CAD consolidated Tuesday's gains. It moved higher in the aftermath of the mixed Canadian manufacturing data and uncertainty over Cyprus to reach 1.0282 highs. Offers noted from 1.0280 to 1.0300 fueled light selling pressure, but the downside was limited to 1.0240 while equity markets struggle.