Yen and sterling continue to weaken ahead of UK CPI

European markets look set to open lower this morning after US markets closed lower, as investors remain cautious with markets near multi year highs, while a North Korean nuclear test is likely to refocus investor attention on geopolitical concerns in the Asia region.

The decline in the yen continued overnight after US treasury official Brainard appeared to endorse recent attempts by Japan to boost growth in the country and end deflation, while working with Japan to ensure orderly price movements. This suggests that recent rhetoric from some US politicians about currency manipulation will be put to one side and that the Japanese will not find themselves criticised for their attempts to weaken the yen, either at the G7, or at the G20 later this week.

While the value of the yen doesn’t appear to be concerning US officials the same it would appear, cannot be said for some European politicians after French finance minister Moscovici once again warned of the effect a rising euro could have on European growth.

This brought a predictably caustic response from German officials that exchange rates should not be manipulated.

We already know that the Bundesbank remains opposed to any type of currency manipulation that contrives to push the euro lower, after Bundesbank chief Jens Weidmann stated that the euro was not overvalued, and that politicians should concentrate on solving their structural problems, warning that a weaker euro could fuel inflationary pressures.

In another positive development for Europe ratings agency S&P upgraded austerity poster child Ireland to a stable outlook in light of the recent bank deal, while consumer confidence in the country also surged in January from 49.8 to 64.2.

The pound which like the yen has been showing significant weakness this year, albeit for different reasons is also set to be in the spotlight today with the latest inflation numbers expected to remain sticky in January due to rising transport costs.

While today’s inflation numbers remain an important yardstick for the pound, markets will be more interested in tomorrow’s quarterly Bank of England inflation report for any clues to the next move in monetary policy by the central bank, with speculation rising that the Bank may well cut its growth forecast once again, raising the prospect of further sterling weakness, as monetary policy remains loose.

While economists expect a drop of 0.5% month on month on both CPI and RPI, the CPI measure is expected to stay at 2.7% year on year, while the retail prices measure is expected to rise from 3.1% to 3.2%.
Given that January showed a sizeable drop in the value of the pound the estimated fall in monthly prices could well be wide of the mark.

Factory gate prices are also expected to show signs of pushing higher, which could well push out market expectations of further Bank of England policy easing. It still remains unlikely that the Bank of England will look at further easing in the near term until MPC members have been able to better determine the effectiveness of the funding for lending scheme.

EURUSD – a bearish weekly reversal following on from the daily reversal seen last Monday suggests the risk of further declines in the single currency over the course of the next couple of weeks.
While we have seen a rebound from the 1.3350 level we have so far been unable to push beyond the resistance at 1.3490 and as such the bias remains for a move towards the January lows at 1.3250.
The long term trend line support at 1.3150 from the 1.2045 lows is the major line in the sand for this uptrend.

GBPUSD – while the pound manages to hold above trend line support at 1.5645 from the 1.3500 lows in 2009, the potential for further rebounds remains in light of last week’s bullish reversal. In the event we see a break below this trend line support then we could well see a retest of the 2 year range lows at 1.5270 on a break below 1.5600.
The pound needs to close back beyond the 200 day MA at 1.5910 to stabilise and diminish the downside risk.

EURGBP – the bearish weekly reversal continues to hold sway but yesterday’s pullback needs to overcome the 85.80 level to target a potential return towards the highs at 0.8715.
The bias remains for a return towards the 0.8425 level initially. A push below 0.8420 has the potential to target trend line support at 0.8125 from the lows at 0.7755.

USDJPY – last night’s move higher now brings the US dollar close to the 2010 highs at 95.00, pushing past the 94.00 level and the 38.2% of the down move from the 2007 highs at 124.15 to 75.30.
Only below the 90.30 level argues for a deeper correction towards key support at 87.50.