With US markets off for Martin Luther King Day yesterday, sterling was the main focus of market attention after it fell victim to a post-weekend hangover for the second weekend in succession on market jitters about the type of Brexit deal sought by the UK government, ahead of today's speech by Theresa May.

While yesterday’s decline in the FTSE 100 was a fairly minor one it did bring to an end a 14-day winning streak, but not before posting yet another record high. The further weakness in the value of the pound was the main catalyst but the failure to push substantively through the 1.2000 level has raised concerns that markets could be heading into one massive bear trap.

The catalyst for yesterday’s sell off is expectations surrounding today’s scheduled 11.45 (UK time) speech by prime minister Theresa May, where she is expected to outline in more detail the government’s strategy towards its negotiations with the EU,  ahead of the triggering of article 50 later this year.

The continued weakness in the pound has also contrived to present the Bank of England with a new problem, partly self-inflicted given last year’s unnecessary substantial measures, namely that of a lower tolerance for higher rates of inflation.

Bank of England governor Mark Carney hinted as much in a speech last night at the London School of Economics, when he said that the bank would look closely at how household spending evolves in the coming months, given recent robust economic data, and that the next move on rates could go either way. He did say though that the MPC’s actions in August had help preserve hundreds of thousands of jobs, an extraordinary claim given Andrew Haldane’s so called mea culpa last week.

Mr Carney went on to say that inevitably consumer spending would slow in 2017, a perfectly reasonable expectation given current high levels of activity, and that this would mean a slowdown in the economy this year.

The consistent outperformance of the UK economy prompted the IMF to upgrade its forecast for the UK economy for this year to 1.5% from 1.1%, given recent data showing broadly robust economic growth, wages and employment across all sectors of the economy.

Today’s inflation numbers are likely to show further evidence of rising inflation pressure with the latest December CPI numbers expected to show rise from 1.2% to 1.4%. This could well increase further in the January numbers when they are released next month given that it was 12 months ago that crude oil prices bottomed out at $27 a barrel and now they are double that.

Core prices are expected to remain unchanged at 1.4%, while retail prices (RPI) are expected to edge up to 2.3%.

It is PPI where the greatest interest is likely to be focussed as concerns about the trickledown effect of higher prices on the consumer’s pocket. Annualised input prices for December are expected to rise further from 12.9% to 15.5%. While retailers may not be able to pass through the full effect we can still expect to see some pass through into the CPI numbers in the coming months.

Irrespective of the strength of these numbers, and expectations on what the central bank might do with respect to interest rates, we still remain well short of the Bank of England’s central inflation target. Furthermore the main focus today will be on what Theresa May has to say on Britain’s place in the EU single market and customs union, both of which are incompatible with taking back control of immigration and trade law.

Buckle up people, the next few hours could well be a bumpy ride.

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EUR/USD – while below the 1.0700 area the bias remains towards the downside and a test of trend line support from the lows this year at 1.0520. We need to see a move back above the 1.0700 area to mitigate the risk of a move back towards 1.0340 as well as parity.

GBP/USD – the pound has found support at the 1.1980 area for now, however the risk remains to the downside while below the 1.2080/1.2100 area. This was the key support on the move down and we would need to see a move back through 1.2100 to stabilise.

EUR/GBP – having broken above the 0.8760 area the bias has shifted to a move euro towards the 0.8920 area. Only a drop back through 0.8750 would call this into question and argue for a move back to the 0.8680 area.

USD/JPY – the break below the 115.60 level looks to have completed a potential double top, with a target located around the 111.00 area. For now we have resistance around the 114.80 area which needs to hold in the short term.

 

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