After yesterday’s UK CPIfigures the pound has surged to its highest levels since last September, against a basket of currencies, pushing back from a trend line resistance from 2009 highs.

 

Today’s Bank of England quarterly inflation report could well propel the pound towards 1.6300 against the dollar if the market perceives any further concern about rising inflation amongst Bank of England policymakers.

 

However particular attention will also be paid to the growth forecasts, and any changes to these, as well as the inflation forecasts.

A word of warning though given Mervyn King’s liking for talking sterling down, he could well caution on growth over the next 12 months, thus raising the spectre of stagflation which could well send the pound back down again, so sterling bulls beware, we could be near a top.

 

Before that we have the small matter of the latest UK unemployment figures where expectations are for a decline in claims of around 3k and the ILO unemployment rate to stay at 7.9%.

 

In Europe disappointing German GDP figures weighed on the euro yesterday while Portuguese bond yields traded at their highest ever levels since the single currency’s introduction in 1999. The euro did find some support against the US dollar, after an agreement to increase the bailout fund was agreed in principle, briefly pulling back above 1.3500, though it continues to struggle to break above the 1.3550 resistance area.

 

Disappointing US retail sales for January weren’t too much of a surprise given last months snow storms, however today’s PPI data could well give further clues as to the inflationary pressures building in the US economy, after yesterday’s import price data came in nearly double expectations at 1.5%, though analysts expect the January PPI numbers to fall back slightly from December’s numbers.

 

Later on we have the publication of the January FOMC meeting minutes which could well be a non-event. However given the apparently more hawkish rhetoric emanating from the two newest members of the voting panel, vis-à-vis Dallas Fed’s Richard Fisher and Philly Fed’s Charles Plosser, we should get an early insight into whether or not Ben Bernanke will get an easy ride with respect to any future plans for further QE after the program of bond purchases runs off in June, given the opposition of these two members to further asset buying programs.

 

EURUSD– the failure to follow through towards 1.3410 has seen the single currency pull back above the 1.3500 level, however the 1.3550 level highlighted yesterday has so far capped any rebound and keeps the potential for a move towards 1.3200 intact. As indicated yesterday the euro needs to close back above the 100 day MA above 1.3550 to delay the move lower. Back above 1.3550 could well see 1.3620. To gain more confidence in this downward scenario it would help if we were to see a correlated close in the US dollar index above its 100 day MA, however this has not happened yet and could scupper our downward euro scenario. Only back above the right shoulder peaks at 1.3750 would re-target the trend line resistance coming in just above 1.4010 from the 2009 peaks at 1.5145.

 

GBPUSD– the pound continues to remain fairly well bid finding support above 1.6000 yesterday and pushing up to its highest levels for a week at 1.6172 before slipping back. The inability to close below 1.6000 continues to frustrate the sterling bears and could keep the pound susceptible to rallies back towards the November highs at 1.6300, as well as the next trend line resistance at 1.6310 from the 2007 highs at 2.1160. A break above 1.6300 targets the 2010 highs at 1.6460. To diminish this downside pressure a close below the 1.6000 level is needed to target a move towards 1.5920 which is 38.2% retracement of the up move from the 1.5350 lows to the 1.6280 highs, followed by 1.5820.

 

EURGBP– the pounds continued resurgence has seen the euro continue to fall through its January lows at 0.8388 and it now looks set to test trend line support at 0.8335 from the 2009 lows at 0.8065, on the way to last months lows at 0.8285. It would need a sustained move back through the 0.8430/40 area to diminish the downside pressure and open up the possibility of a rebound back towards the 0.8480 area, a break of which would then suggest 0.8540.

 

USDJPY– another new daily high in the yen at 83.90 here as the dollar looks to re-test the December 2010 highs around 84.40/50. Any pullbacks should find support around the 83.20 area and below that at 82.80 and the 50 day MA and last weeks break-out level. A break below here would then re-target the 82.20 area. The 84.40/50 area remains the overall longer term target while US bond yields remain resilient and above 3.5%.