When Bank of England governor Mervyn King was delivering his inflation report last week, he probably couldn’t have imagined that the Banks inflation forecast could have unravelled so quickly, after announcing last week that the key CPI measure was firmly on a downward path. It’s only been six days since last week’s report yet yesterday’s surprise jump in July CPI appears to have undermined that prediction already, and once again cast doubt on the Bank’s, as well as other economists forecasting abilities, when it comes to inflation. These same economists remain insistent that the path to lower prices remains intact and that yesterday’s numbers are merely a blip, insisting that wages will soon begin to rise faster than prices. Today’s average weekly earnings data is expected to belie that belief reinforcing the squeeze on consumer incomes with a rise of 1.7%, up only marginally on the previous months 1.5%. Given the Bank’s recent track record on inflation over the last five years it is easy to be sceptical about its forecasting abilities and probably wise to be so. The recent 20% rise in oil prices since the middle of June, and the sharp rise in agricultural commodity prices over the past few weeks, are likely to keep price pressures elevated and really ought to give the bank pause in the coming months when it comes to considering further QE. It does seem however that economists and the Bank continue to underestimate the effects of these rising prices, which seems extraordinarily complacent of them Let us hope they are right on this occasion. Today’s Bank of England minutes are likely to shed some light on the decision to keep monetary policy unchanged at the August meeting, and whether there was pressure to add to the stimulus announced in July prior to the dreadful GDP numbers announced later in the month. It would seem likely that most policymakers should have been content to ascertain the effects of the new “funding for lending” scheme in conjunction with the extra stimulus announced in July. The last minutes showed that Ben Broadbent and Spencer Dale were the two hold outs who wanted to see how the “funding for lending” scheme would work before adding to asset purchases. They also felt the sharp fall in June inflation was probably due to the sharp fall in oil prices and could well be temporary. As it turns out they were outvoted, but it looks likely they could well have been right. One of the surprises of the last few months has been how well employment has held up despite an economy in recession for three quarters in a row. Jobless claims for July are set to rise by 6k while the ILO unemployment rate to June is expected to remain unchanged at 8.1%, with some speculation that the Olympic Games could well have helped keep unemployment down. EURUSD – the single currency remains hemmed in between the 55 day MA and resistance in the 1.2430/40 area and 1.2245 trend line support from the 1.2045 lows. A break of support has the potential to retarget the 1.2150 area, as well as the 1.2045 lows. We remain mindful of the bullish weekly candle from two weeks ago which still suggests we could be gearing the market up for a euro rally, but any break below 1.2240 targets 1.1880. The key level on a monthly close remains the 200 month MA at 1.2060, the July lows. GBPUSD – cable remains stuck between the 200 day MA at 1.5725 and resistance between 1.5740/80 and the trend line support from the 1.5270 lows at 1.5480. Above 1.5780 and we could see a move to 1.5910. A break below the trend line support at 1.5480 suggests a move back to 1.5270. Only a close below 1.5240 signals a risk of a return to the July 2010 lows at 1.4950. EURGBP – the resistance at 0.7880 continues to cap the single currency and while below this level the support at 0.7820 remains the key barrier to a test of the downside and previous lows at 0.7755. A break of 0.7880 is needed to retarget the 55 day MA which remains strong resistance at 0.7960, along with trend line resistance at the same level from the February highs at 0.8505. USDJPY – still range trading here US dollar remains becalmed between support below 78.00, and resistance above 79.30. The cloud support at 77.30 and the May lows at 77.60 remain a key level. As long as this holds the downside, the risk of a rebound remains quite high. A move above the 79.30 level brings the 80.00 level back into play and then by definition the main resistance at the top of the weekly cloud at 80.45.