Notwithstanding the constant stream of negativity directed towards the single currency over recent days, the euro has at least stabilised and, in some instances, actually managed to creep higher against some of the major currencies. The EUR is comfortably through the 1.31 level overnight, and EUR/GBP is up at 0.8330. Certainly the encouragement from both China and Japan has helped to steady nerves at a time when the ECB has been steadily accumulating more PIGS debt. Indeed, over the last couple of days, there has been some notable buying by Asian sovereigns with China confirming on Wednesday that it had bought Spanish bonds and would be buying more.

In addition, it appears that there might be some thawing within Europe regarding the next response to the eurozone debt crisis. For instance, there has been suggestions that the size of the EFSF may be expanded (Germany tried to scupper this notion yesterday), that the interest rate applied to Ireland's bailout may be reduced, that aid be supplied to Portugal and that eurozone bonds might be issued under the auspices of the EFSF. Even German Chancellor Merkel was moved to describe Portugal's deficit reduction efforts as "quite impressive".

Portugal's bond sale was well-received: the 10yr auction attracted a bid-cover of 3.2 times, vs just 2.1 times back on November 10th, and the Portuguese Finance Minister claimed that 80% of demand came from abroad. Interestingly, Bund yields soared yesterday, the 10yr benchmark climbing 11bp to 3.04%. It remains to be seen whether this reprieve lasts but, for now, euro bears are closely watching the price action.

Commodity prices still rising. Amidst the single-minded focus on the single currency and its peripheral bond markets, what has almost been missed in recent days is the relentless rise in commodity prices. Oil prices, which fell to $92 a barrel last Friday, traded through $97 for most of Wednesday, whilst the price of copper rose 2% alone yesterday. The Journal of Commerce Index of Industrial Materials Prices registered a new record high yesterday - in less than two years, industrial materials prices have more than doubled. Little wonder that both China and India have an inflation problem. Soon the West will start worrying more about inflation than deflation.

Trade figures offer some encouragement for sterling. Although the headline UK trade figures were slightly disappointing, a closer examination suggests a more sanguine interpretation is warranted. Excluding oil, the trade deficit narrowed by more than £0.5bn to £8.1bn in November, helped by a 4% jump in goods exports. In contrast, imports excl. oil were essentially unchanged. That said, the jump in oil imports in the month cannot be ignored - most of the increase in the oil deficit reflects a 42% surge in crude oil volumes. These trade numbers (at least) confirm that the exports side is registering the kind of growth suggested by recent surveys, helped by a more competitive currency. For now, however, the imports side seems to be offsetting these export gains.

Some thoughts on the reluctant pound. This month, the UK has seen the biggest rise in short-term interest rates of any of the major markets, with the 2-year swap rate nearly 20bp higher than at the end of 2010. The relevance is that the 2-year interest rate spread has the greater influence on the currency, the correlation with cable being around 0.40 over the past year. That said, this relationship has broken down so far this year, with the reaction of the pound quite muted in relation to the sharp upward move in interest rate differentials.

Inflation has been above target for the past 12 months, with every reason to believe that it will remain so in the coming year (indeed, there are decent risks of it touching 4% in the coming few months). In addition, there is the concern that, even if official interest rates do move higher, the impact this may have on inflation could well be limited. Inflation is not coming about from strong consumption that needs to be curtailed or high wage increases, hence the Bank of England's relaxed attitude to this prolonged period of elevated inflation. Sterling's performance so far this year has been enlightening, a reflection of international investor reticence about jumping into sterling assets with both feet. For now, one foot seems to be quite enough.

EU Parliament boosts ECB call for tougher budget rules. It appears that the European Commission is minded to side with the ECB in the debate over tougher sanctions for those sovereigns which transgress Europe's fiscal rules. According to a Bloomberg story, European Parliament members are proposing more automatic sanctions on fiscal miscreants in legislation that was circulated among lawmakers yesterday. The system for fining any of the 17 nations that are part of the euro area forms the central tenet of the draft. Penalties could commence even before a country has breached a limit. There is also a fine for any country that fudges their fiscal figures (Greece beware).

The unstoppable momentum of Asian currencies. Concerns about rising inflation, higher official interest rates and strong capital inflow provided Asian currencies with some further momentum overnight. The South Korean won rose to a two-month high vs the dollar after another 25bp rate hike from the central bank, following a similar move from Thailand's central bank the previous day. Like China and India, South Korea is extremely concerned about the acceleration in inflation. The Chinese yuan rose for a third straight day to below 6.60 against the dollar, not far away from a 17yr. Chinese President Hu Jintao meets US President Obama next week. Central banks in Asia - including the BOK, the Malaysian central bank and the Bank of Taiwan - have been intervening substantially again overnight.

Elevated UK inflation is a problem for both King and Cameron. It promises to be a very challenging time for UK policy-makers over coming months. The Bank of England meet this morning for the first time this year knowing that it will come under serious pressure to raise interest rates in response to the continuing stubbornness of inflation. Although a rate hike today does not appear likely, it is February's meeting of the MPC where the discussion about a possible rate hike will become especially intense. With the rubber starting to stick to the the road of Prime Minister Cameron's policy of fiscal austerity over coming months, higher interest rates from the BOE would certainly increase the political pressure on the government.