Equity markets rebounded strongly yesterday after the latest inflation numbers from Europe appeared to increase the prospect that we could well see some kind of additional policy action at this month’s ECB rate meeting on the 22nd January, and this rebound looks set to carry on this morning, as markets absorbed a slightly more dovish than expected set of Fed minutes. The slide in headline prices to -0.2% for December given ECB President Mario Draghi’s comments last week appear to be raising investor expectations even further to expect some form of significant policy action this month, despite the risks of an uncertain outcome to the Greek election three days later. The big concern is that the market may well be getting ahead of itself in its expectations, given that core prices actually rose to 0.8%, reinforcing the effect that the volatile nature of energy prices is having on headline prices, with energy prices accounting for 6.3% of the decline. Isn’t this why central bankers tell us that they like to look past transitory effects with respect to inflation numbers when setting policy, or at least they like to when it suits them. The Bank of England did that when inflation was running at over 5% a few years ago and we’ve also heard similar refrains at various times from Federal Reserve as well as ECB officials in the past few years. In any event the decision on whether the ECB should do more has pretty much turned into a sideshow now given that it is unlikely that with yields already at record lows, that any new measures would be all that effective. With European banks being encouraged to build up their balance sheets with safe assets to comply with new capital requirements, why would they part with these high rated sovereign assets and take on more risk? In any case Mario Draghi’s job got that much more difficult yesterday when the latest unemployment numbers showed German unemployment at a record low, at the same time as Italian unemployment hit a record high. Such are the difficulties of setting policy in the single currency area, with increasingly divergent economic conditions. The latest FOMC minutes also reinforced the perception amongst officials of an expectation of further measures from the ECB, with the committee expressing concern about economic turbulence in the coming months, but Fed officials also reinforced their message of patience in the timing of any rate rise, which appeared to suggest that a rate rise would not come before April. This would appear to confirm the narrative that a number of Fed officials may well be concerned about a premature move on rates, as well as the strength of the US dollar with respect to the effect on the US’s trading partners. Given all of this and the rise in expectations of investors, as well as the expectation on the part of the Federal Reserve that more stimulus is coming, the ECB had better not disappoint later this month, or it could get rather volatile. Given the politics at play and the propensity of the ECB to over promise and under deliver, disappointment seems the most likely outcome given the likely inability of the ECB to form a consensus. As far as interest rate expectations are concerned in the UK, today’s latest Bank of England meeting is likely to be as big a non-event as pretty much all of the previous meetings over the last 18 months. Unlike this time last year no-one is talking about a rate rise, hence the recent sharp falls in the pound over the last few weeks, as the prospects of a rise in rates has slipped out into Q3 of this year at the earliest. EURUSD – the euro continues to grind its way lower with another new 9 year low yesterday at 1.1800 on its way towards 1.1500. Any pullbacks are likely to find resistance at this week’s high at 1.1975, as well as 1.2240 where we have the 200 month MA. GBPUSD – further weakness appears to be the order of the day as we push below 1.5110 with little in the way of support between here and 1.4810 the lows in 2013. We could find support at 1.4980 though. Any pullbacks are likely to find selling interest at 1.5320. EURGBP – currently range trading between 0.7800 and resistance at 0.7870 with the key reversal day last week suggesting the possibility of a move towards 0.7930. Below 0.7800 retargets the six year low at 0.7744 last week. USDJPY - after being rebuffed at 120.80 last week the US dollar is starting to look a little heavy. A retest of the 115.60 level remains a possibility while below these key levels given the bearish engulfing week a few weeks ago. A move back below 117.80 argues for move back towards the lows last month at 115.60. CMC Markets is an execution only service provider. 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