Yesterday’s warning shot by ratings agency Moody’s doesn’t appear to have shaken the pound too much, even though there does appear to be plenty of evidence to suggest that the UK economy is starting to slow down, on a combination of rising inflation and shrinking incomes, as well as concerns about fall-out from the situation in Europe.

Yesterday’s rebound in retail sales for December to the highest levels since May as well as a better than expected consumer confidence number from Nationwide saw the pound hit its highest levels against a basket of currencies since March.

Today’s publication of the latest Bank of England minutes is expected to show that the Bank while mindful of concerns about growth, are in no hurry to pre-commit to further asset purchases in the short term, a point made recently by Spencer Dale the Bank’s chief economist.

Today’s public finance data for November is expected to jump sharply to £16.6bn from October’s surprisingly low £3.4bn.

In Europe markets will be awaiting the announcement of the latest long term refinancing operation (LTRO) from the ECB. Yesterday’s sharp drop in Spanish bond yields suggests that banks are starting to buy Spanish and Italian debt again on a short term basis, taking advantage of the higher yields with a view to financing by way of the ECB’s 3 month and 36 month repos and pocketing the carry. Expectations are for a take up of around €200bn-€300bn.

Italian Q3 GDP is expected to show that the economy contracted by 0.2% a slide of 0.5% from the previous 0.3% as austerity measures start to bite.

US housing data has started to show some improvement in recent months with existing home sales in November expected to rise 2.6%, up from 1.4% on October.

EURUSD – we saw the single currency break out to the upside yesterday, however it was unable to get beyond the 1.3150 area and as such the risk remains for further losses.
The January lows at 1.2870 remain the main barrier to a move towards the August 2010 lows at 1.2590.
Yesterday’s rather bullish daily candle seems to suggest limited downside in the near term and as such we could well see some range trading unfold now between the recent lows at 1.2950 and the 1.3150 and even possibly 1.3220.

GBPUSD – yesterday’s strong move higher and break beyond the recent highs around 1.5580 provoked a sharp move towards 1.5700 as we suggested it might in yesterdays note. The key level remains around the 55 day MA at 1.5740 as well as this month’s high at 1.5780. Only beyond 1.5780 targets 1.5900.
The longer term support from the 2010 lows at 1.4230 remains the key level and now comes in at 1.5425. A move below 1.5400 retargets the 1.5270 lows in October, and then 1.5190 61.8% retracement of the 1.4230/1.6745 up move.

EURGBP – the single currency continues to slide lower against the pound breaking below the recent lows at 0.8370 yesterday as it edges towards the 2011 lows at 0.8285 and ultimate target. The key resistance remains around the highs this week at 0.8425, and only a move beyond here would target a move back towards 0.8450 and even the 200 week MA at 0.8567.

USDJPY – the US dollar continues to hold above the 77.20/30 level and 55 day MA area and this keeps the likelihood of a rally towards trend line resistance at 78.50 from the 2007 highs at 124.15, on a break above the 78.30 level, intact. The 200 day MA at 79.10 is the key long term resistance.
Only below the 55 day MA would undermine this scenario, and risk a move lower that would see the next key support area around the 76.20/30 area, a break below of which opens up the lows at 75.30.