This morning\'s move by the Bank of Japan to leave rates unchanged and keep the cash flowing into the economy was no surprise given the events of recent weeks.


As such the focus now moves to the UK and Europe and the central bank meetings of the Bank of England, followed by the European Central Bank.


And so another European domino falls as Portugal finally bowed to the inevitable and asked for an EU bailout late last night. Its final acceptance of its fate was in no doubt prompted by the inevitability of today’s well telegraphed rate hike by the ECB, allied to the high borrowing costs associated with yesterday’s six and twelve month T-Bills auction.


The bigger question now is whether the markets will turn its attention to Spain in the likely event the ECB raises rates this afternoon.


First up, however, is the Bank of England and yesterday’s disappointing 1.2% fall in UK industrial productiondata for February seem to make the likelihood of a rate hike today fairly slim now, despite the positive PMIdata earlier this week.


The Bank will probably announce no change to monetary policy, preferring to wait until they have sight of Q1 GDPdata later this month, even though inflation data next week is likely to exert further pressure on them to raise interest rates to prevent consumer expectations of it becoming embedded.


The European Central Bank is likely to have no such qualms, despite an inflation rate half of the UK’s and are expected to hike rates by 0.25%.


This is pretty much discounted as a given so it would be a major surprise if they were to hold.

In the event markets get what they expect, the ECB post meeting press conference will be critical in how Trichet justifies any rate hike, and whether or not it is the first of many.


The key factor in the event of a rise in rates is how this translates across to the housing markets in Ireland and Spain where a high proportion of mortgage holders are on variable rate mortgages and the effect this could have on further bad debts.


It certainly won\'t be popular and could bring Spain into the markets cross hairs now that Portugal has bowed to the inevitable.


The US dollar remains weak as a government shutdown looms while US weekly joblessis expected to come in around 385k, further reinforcing hopes that the US economy is in recovery mode.


EURUSD– the bearish scenario looks to have broken down after yesterdays break above the convergence point of the November highs at 1.4280, and long term trend line resistance from the all time highs at 1.6040 in 2008. We now look as if we could well be set for a strong rally to 1.4580 and the 2010 highs. Pullbacks should now find support around the 1.4250 area while a drop below would then target the key support area from the lows this year now around 1.4140 and the 1.4020/30 area. Only a drop through the 1.4020/30 level can signal a re-test of the 1.3850/60 level.


GBPUSD– the pound continues to push higher towards the top end of our recent ranges between 1.6350 and 1.6400, while a move above that targets 1.6460, the 2009 highs. The 1.6180 level that saw the break higher now becomes an interim support level again. The key support on the downside remains the range lows around 1.5965 which has pretty much contained any drop since the end of January. The major trend line support now comes in around 1.5850 from the lows last year at 1.4230, but we can only expect to see a test of that on a close below 1.5980.


EURGBP– after finding an element of support around 0.8715 the single currency pulled back towards resistance around the 0.8800 level. There is potential for a pullback towards the previous peaks at 0.8850, however this is not preferred. While below the 0.8850 level the bias remains for a move lower, towards the 0.8650/60 area, which is a 38.2% retracement of the up move from the 0.8355 lows to the recent highs at 0.8850. Above 0.8850 re-targets 0.8940.


USDJPY– the long term trend line resistance at 85.60 from the June 2007 highs around 124.00 has so far kept a lid on the dollar’s advance here and it does look a little overextended in the short term. 85.60 is also 50% retracement of the down move from the 2010 highs at 95.00 to this years low at 76.25. Any pullbacks now should be limited to around the 200 day MA around 83.50. A break above the 85.60/90 area targets 87.90 which is 61.8% retracement of the same move.