Bank of England and Fed minutes the focus today

The rise in stock markets and the euro appears to be back on track after yesterday’s German ZEW numbers, however the latter is likely to bring its own problems as the weaker euro nations once more bemoan the strength of the rising euro.

Today’s German CPI inflation numbers may offer some respite especially if they come in below expectations as they will invite further speculation about the timing of a possible ECB rate cut. Expectations are for a month on month decline of 0.5% with the annualised measure coming in at 1.9%.

One month ago the release of the Bank of England January minutes appeared to indicate that a number of policymakers were beginning to have reservations as to the efficacy of further QE in helping the UK economy.

Despite some of the recent poor data, which suggest another quarterly contraction for Q1, it is unlikely that view will have changed that much, with respect to the February minutes, especially so given that the recent policy of talking the pound lower in an effort to help UK exports, appears to have worked far better than any further asset purchase program could have done.

Unfortunately the law of intended consequences has resulted in a crisis of confidence in the pound as investor’s dump their sterling holdings as the Bank of England appear to have given up any pretence that it even had an inflation target these last few years, and appears ready to tolerate higher prices in the months and years ahead.

The recent relaxed approach to rising prices by current governor Mervyn King, comments by MPC member Martin Weale this week, and the recent comments from new governor to be Mark Carney, is likely to mean just that given the UK is a net importer, and will likely continue to squeeze consumer incomes.

This is likely to be borne out by the latest average earnings numbers which are expected to show a rise of 1.4%, down from the previous 1.5%, further eroding consumers ability to spend and help the economy recover.

The one bright spot has been the resilience of the labour market these past few months and the latest numbers are also expected to show a fall in the jobless claims numbers of 5.5k, while the ILO unemployment rate is expected to stay at 7.7%.

While the Bank of England is set to remain downbeat the US Federal Reserve is likely to be slightly more positive, despite concerns about the sequester and the recent contraction in Q4 GDP.

The latest minutes from the FOMC will be of particular interest for two reasons, firstly to gauge the committee’s reaction to the poor Q4 GDP number, and to establish whether they viewed it as a temporary blip, and secondly to establish whether the dynamics of the three way split seen in the December minutes with respect to the tapering off of QE, has changed at all with the addition of the new voting members, James Bullard and Esther George, whose recent comments appear to suggest that QE does have a distinct shelf life.

EURUSD – trend line support from the 16th January lows appears to be holding for now at 1.3315 on our potential head and shoulders. Trend line resistance from the most recent highs comes in at 1.3420.
While below 1.3520 and the 200 week MA keeps the bias for a move lower and also keeps the bearish weekly candle scenario of two weeks ago alive.
The long term trend line support at 1.3190 from the 1.2045 lows remains the major line in the sand for this uptrend.

GBPUSD – the pound continues to drift slowly lower with the current momentum bringing it ever closer towards 1.5270 and the June 2012 lows. We need to see a recovery back through 1.5580 to target the 1.5700 level and to stabilise in the short term.

EURGBP – the euro appears to be closing in on the previous highs at 0.8715, while a move above could well see further gains towards 0.8770.
The 0.8580 area continues to remain the key support. We need to get back below 0.8580 to retarget a move lower towards the lows of last week at 0.8460.

USDJPY – the US dollar appears to be trading in a corridor between 92.20 and 94.20 with a break out either side likely to suggest a sharp 200 point move higher or lower.
Below 92.00 suggests a move towards the 90.30 level and 29th January lows. A move through 94.00 targets the 95.00 area and 2010 highs.