Yesterday’s surprise jump in UK CPIfor April to 4.5% shouldn’t really have been a surprise, given last month’s record high oil price, along with the increase in tobacco and alcohol prices post budget.

They don’t however change the argument about the future direction of UK interest rates in the short term, even though core inflation is at record levels on the CPI measure at 3.7%.

Concerns about consumer indebtedness by central bank governor Mervyn King are likely to weigh as a dead hand on any rate rise, as well as the current mathematics with respect to voting patterns on the MPC.

Today’s publication of the MPC minutes for May could well see the timing of the next rise in rates see some fierce debate, and given the strength of these numbers June’s meeting could be an interesting affair.

Also out today is UK unemployment data which is expected to stay at 7.8% on the ILO measure while jobless claims are expected to remain flat.

 

The single currency has had a fairly good 24 hours, despite some talk of “soft restructurings” or “re-profiling” of Greek debt by European officials.

This was probably more as a result of US dollar weakness than euro strength after some extremely poor US housing data, while US industrial productiondisappointed as well, coming in flat against an expected rise of 0.4%, and well below March’s 0.8%, further reinforcing concerns about a slowdown in US growth for Q2.

Be aware that ECB members Stark and Bini Smaghi are due to speak this morning and they have a tendency to be hawkish, by talking up inflation risks which could raise expectations of higher rates, which could underpin the euro.

Today’s FOMC minutes could well give further clues as to the Fed’s thinking with respect to next months QE2 roll-off, especially with US Q2 growth forecasts already starting to be downgraded, there is a concern that continued deterioration in economic data could prompt speculation of further QE or QE3, especially given that US bond yields are already sinking with the 10 year bond yield pushing near to its 200 day MA at 3.08%.

 

EURUSD– the resilience of the single currency has been a little surprising in the past couple of days when considering the fundamental back drop, however despite its recent strength it has yet to close above the 55 day MA at 1.4284 which remains the key resistance level. A break above 1.4280 however could well target a quick run up to 1.4380/1.4400.

A key support on the downside remains around the 1.4000 area and the 200 week MA, a break of which could see a test of 1.3905 and the 50% retracement of the up move from the 1.2870 lows to the recent peaks at 1.4940.

 

GBPUSD– yesterday’s sharp rally in the pound saw a sharp rally to 1.6300, however despite poking its head above the 55 day MA at 1.6290 it was unable to close above it keeping the outlook negative in the short term.

Pullbacks should continue to find resistance around yesterday’s highs and while below 1.6290 the focus remains on 1.6130 on the way to the major support level on the downside, which remains around 1.5965, the February and March lows.

 

EURGBP– the upper line resistance at 0.8790, of the triangular consolidation is the key barrier to further euro gains in the short term after yesterday’s brief dip below the 0.8700 level failed to break beyond this months low at 0.8675.

The rebound has still as yet been unable to overcome the 55 day MA at 0.8768 and as such keeps the focus on the 0.8620 area which is the 61.8% retracement level of the 0.8355/0.9040 up move.

 

USDJPY– comments by BOJ governor Shirakawa about the severe state of the Japanese economy saw the yen slide back yesterday despite the softness in US 10 year bond yields, and as a result the yen pushed beyond the 81.20/30 area.

Despite a close above the resistance level yesterday we’ve seen the US dollar slip back below these old highs, mainly due to this weakness in the US yields, and the failure to hold these levels raises the risk of a move back towards support around the 80.20 area which is trend line support from the all-time lows at 76.25.

In the longer term while above this support level the odds remain in favour of a test towards the 55 day MA at 82.05.

A move below 79.80 could well target further losses towards 78.80.