Bank of England in spotlight ahead of inflation report, as Southern Europe goes on strike

Recent commentary from Bank of England policymakers about the effectiveness or otherwise of further QE was said to be the reason behind last week’s decision to pause on further asset purchases, but fears about rising inflation could well have played a part as well.

Over the course of the last five years we have been constantly assured by policymakers that inflationary pressures were temporary, but still inflation remains sticky and yesterday’s inflation numbers bore that out, even if the rise in tuition fees is a one off, rising food and energy prices are not and continue to point to an upward track for prices.

Furthermore yesterday’s CPI numbers aren’t likely to bode too well for this week’s October retail sales numbers, or for the rest of the quarter, as consumer incomes continue to get squeezed in the lead-up to Christmas.

Average earnings data due out today is expected to show a rise from 1.7% to 1.9%, for the three months to September, well behind the inflation rate.

As concerns grow that the recent fall in inflation could be starting to reverse today’s Bank of England inflation report could well be enlightening with respect to whether or not the governor changes the bank’s growth forecasts and inflation projections into 2013, in light of recent disappointing economic data.

The governor is also likely to have to field questions about the controversial decision last week to hand over the profits from the banks QE program to HM Treasury, with some commentators questioning the banks independence in agreeing to such a request.

Also due out today is the latest unemployment data for September which is expected to remain unchanged at 7.9%. Jobless claims are expected to be unchanged.

Back in Europe nothing much has changed, with most of the talk on Greece’s debt sustainability, though yesterday’s €4bn Greek t-bill auction may well have bought Greece a little more leeway in getting it past Friday’s €5bn bond repayment to the ECB.

Though Greek politicians may have bought themselves more time with respect to meeting their budget goals the extra money to do that has divided their creditors more than ever, with no-one prepared to consider any form of restructuring or write downs, with the IMF looking increasingly isolated.

In any case Greece could be given ten more years and it wouldn’t make a jot of difference given that the Greek population has no appetite for any further austerity, along with the rest of peripheral Europe.

Today’s general strikes in Greece, Portugal and Spain are testament to that, while today’s Portugal Q3 GDP number is not expected to post a rosy picture with respect to its own adjustment program, with a decline of 0.6% following on from Q2’s 1.2% fall. Greece’s latest Q3 GDP is also due with no improvement expected from Q2’s 6.3% decline.

While talk of the upcoming fiscal cliff continues to unsettle markets in the US as well as Europe, the economic data from the US continues to be broadly positive. This could change though with the latest October retail sales data expected to show a fall of 0.2%, in sharp contrast to September’s 1.1% rise.

Later on the latest FOMC meeting minutes are due to be published, however given that the meeting was just prior to this months presidential election they aren’t likely to be too controversial, despite the recent improvement in some of the economic data.

EURUSD – the reluctance of the single currency to follow through towards the 1.2650 level and 100 day MA, suggests we could be susceptible to a short squeeze. Just below 1.2650 we also have 1.2605 which is 50% retracement of the 1.2045/1.3170 up move. A break of 1.2740 could trigger a move back towards the 200 day MA at 1.2825.
A rebound needs to overcome the 1.2900 level to stabilise and target 1.3000.

GBPUSD – the 200 day MA at 1.5850 remains the key support here with a break below this key level opening up the potential for a move towards 1.5790 and 1.5660.
Rebounds need to get back above the previous support level at 1.5960 level to retarget last week’s high at 1.6050.
The pound needs to get above 1.6080 to open up a move back towards 1.6180.

EURGBP – the 50% retracement of the up move from 0.7755 lows to the 0.8165 highs at 0.7955 continues to hold on the downside and as such the bullish daily candle warning on Friday remains valid for a potential rebound.
We need a break of resistance at 0.8030 to confirm a retest of the 0.8075 31st October highs; otherwise the trend remains for a lower euro, towards 0.7920.

USDJPY – the break below the 79.75 level undermines the bullish scenario once more with Friday’s low at 79.00 a 50% retracement of the up move from the 77.25 lows to the 80.70 highs. A break here opens up 78.55.
The US dollar needs to recover back above the 200 day MA and the 79.80 level to retarget the 80.70 level.