Yesterday’s news that UK inflation had fallen to 1.9% for the first time since November 2009, and below the Bank of England’s target rate will be welcome news, but only if average earnings go in the opposite direction. For 5 years now the gap between the two has been a chasm, but now the two measures appear to be converging with inflation doing most of the legwork to close the gap. Today’s average earnings data is expected to remain unchanged at 0.9% for the three months to December, a difference of 1%, a significant improvement from a few months ago, but still a big gap. This gap, and in particular the lack of wage improvement, has been one of the more puzzling outcomes of the recent recovery in line with the fall in the level of unemployment, and has caused a great deal of head scratching amongst economists. Last month we saw the ILO unemployment numbers fall to within a whisker of one of the Bank of England’s guidance staging posts for even considering a rise in interest rates and in the process saw the Bank revise the criteria for just such a move to a range of measures that assessed spare capacity in the economy. Expectations for December are for the unemployment level to remain unchanged at 7.1%, but in my opinion there is a risk we could see the unemployment rate increase slightly. It was only in October that the rate was at 7.7% and unemployment levels never fall in a straight line. Given that the rate is calculated using a three month average it seems more likely that we could see the rate tick higher for no other reason than the one month November number came in at 7.4%. Factor in the October rate at 7% and we would need to see the December number come in below 7% to even get close to 7.1%, which suggests that unless December was a particularly good month then the odds could well favour a slight increase, which could send the pound on a trip lower. We also have the latest Bank of England minutes and if MPC member David Miles’ comments earlier this week were any guide there could well be some differences of opinion with respect to the amount of slack in the economy, and the possible timing of any potential rise in interest rates, along with any insights into the debate went into the new guidance guidelines announced last week. Later in the day we also have the latest FOMC minutes for the meeting at the end of January where we got the second instalment of the tapering program. The minutes could well give an insight into how high the proverbial bar needs to be to prevent a further taper in four weeks time when the Fed meets in March, when Fed officials will have had an additional two extra jobs reports to mull over. This is likely to be particularly instructive given how disappointing some of the recent economic data has been in recent weeks, and while Fed Chair Janet Yellen didn’t offer too many clues last week it could be instructive to find out whether any Fed officials were concerned that the recent bad weather might be masking a deeper concern about the recent slowdown in economic data. Just before that housing starts and building permits data for January is due for release, and given the poor weather it would be highly surprising if both these didn’t disappoint in some way. Housing starts are expected to decline 4.9%, and permits 1.6%, after all, who builds houses in a blizzard. EURUSD – the euro appears to be slowly edging towards the key resistance at 1.3845, which is long term trend line resistance from the all-time highs at 1.6040 and ultimately this remains the key obstacle to a move through 1.4000. We’ve also move above 1.3755 and in the process invalidated the bearish engulfing monthly candle posted in January. While this is a blow to the downside scenario, while we remain below 1.3845 it just about remains intact. GBPUSD – the pound appears to have run into some selling interest at these currently elevated levels. The failure at 1.6820 this week could prompt a fall back towards 1.6510/20, particularly if economic data disappoints this week. The bias remains for further gains but we could well see a correction first. EURGBP – the 0.8160/70 area, continues to underpin the euro but the bias remains for a move towards the 2010 lows and 0.8065. Pullbacks are likely to find resistance around the 0.8270 area and 0.8330. USDJPY – yesterday’s rebound back to 102.80 fell short of the 103.00 area required for a move back higher. This suggests that the risk remains for a drift lower towards the 200 day MA at 100.20. This weeks low at 101.40 keeps the pressure on the downside with the first support at the twin lows at 100.80. To stabilise we need to see a move back above the 103.00 level, and the highs this month to argue for a return to the 105.50 area. CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.