In the UK the main focus this morning will be on Bank of England governor Mervyn King’s testimony to the House of Commons Treasury Select committee to explain his thinking behind this month’s rather controversial decision to embark on the latest round of asset purchases despite inflation being at multi year highs, above 5%.

The main concern remains is that the Bank is rapidly losing its inflation credibility mandate, especially given that it has maintained consistently for the last 3 years, that inflation will fall back towards target, and has so far been woefully wrong at every count. With core price inflation also above target at 3.3% it is hard to argue that inflation is as transitory as the bank says it is given that their recent record on it has been so woeful. With the UK being a net importer and oil prices rising again inflation could well prove to be much less transitory as the Bank thinks.

Today’s latest BBA mortgage approvals are expected to hit their highest levels for six months at 36k but still remain at fairly anaemic levels, highlighting the tightness in the housing market.

Financial markets continue to push higher with equity markets hitting two month highs despite the continued uncertainty with respect to this weeks EU leaders summit.

On Wednesday Angela Merkel will go to the Bundestag to ask them to vote on leveraging up the EFSF from the current €440bn to around €1trn using financial engineering, on the basis that Germany would not have to put any more money up.

This is somewhat ironic given that this is exactly the sort of “smoke and mirrors” that political leaders claimed had been a major cause of the sub-prime crisis, and had criticised the banking sector for.

Attention has also remained focussed on Italy in light of continued concerns about Berlusconi’s government’s political appetite to do what is necessary to get its finances in order.

The Italian prime minister\'s assertions that his government will push through significant structural changes has been met with scepticism in some quarters not least by Merkel and Sarkozy themselves.

Italian 10 year bond yields continue to remain elevated despite continued bond buying by the ECB, just below 6%.

Yesterday’s disappointing economic data has raised fears that the European economy may be falling back into recession, with all the problems that may bring with respect to growth, and today’s latest German Gfk consumer confidence figures are expected to reinforce that with a reading of 5.1, while French consumer confidence is also expected to decline from 80 to 78.

In the US the latest consumer confidence numbers for October are expected to show a slight improvement to 46.5, from the previous months 45.4.

EURUSD – yesterday’s push higher continues to push the single currency towards the 55 day and 55 week MA resistance between 1.3920 and 1.3940, closing in New York last night around 1.3930. Beyond these two barriers targets 1.4000 which is the 200 week MA, this will be a pretty tough nut to crack.
The euro needs to break back below 1.3820 to retarget last week’s lows at 1.3650, which is the main obstacle to a test towards 1.3520.
To reopen the downside the euro needs to get back below 1.3520.
The outlook remains for a longer term move towards 1.3050, which is the 61.8% retracement level of the 1.1880/1.4940 up move.

GBPUSD – continues to remain fairly well supported pushing back above 1.6000 yesterday. The pound has potential to head towards 1.6105 which is 61.8% Fibonacci retracement of the down move from 1.6620 to 1.5270.
To reopen the downside the pound needs to break back below last week’s 1.5850 resistance which was the 50% retracement of the same move.
Back below 1.5850 retargets the 1.5670/80 area as well as last weeks low at 1.5630.

EURGBP – the single currency continues to struggle near the range highs at the 0.8790/00 area.
Only below the 0.8650 area has the potential to see a retest of this month’s lows at 0.8530.
A break below 0.8530 looks for a test of 0.8455, 61.8% retracement of the 0.8065/0.9085 up move.

USDJPY – continues to trade 76.00/78.00 with little indication of which direction the likely breakout will occur, despite another dip below 76.00 to 75.90 on Friday the second such failure this year.
The recovery in US bond yields, while generating some uplift more hasn’t generated the momentum needed for a move beyond 78.00.
Only a close below 76.00/30 targets 74.50.