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EURUSD – Wednesday's U.S. Consumer Price Index report for January is likely to provide the tone and direction for the EURUSD early tomorrow as traders will get insight into the current and projected rates of inflation. Expectations are for a rise of 0.3 percent and an annual growth rate of 4.2%. Like the recent report in the UK, higher food and energy are to blame.

Tomorrow's report is critical, as traders will have to carefully read and digest the release of both the CPI and the core CPI. While the Fed's actions have been to aggressively cut rates, a steady number is likely to generate a modest trade as traders will interpret this as a reason for the Fed to "wait-and-see" about further cuts. A higher than expected number is likely to cause the most volatility as this would indicate the Fed has gone too far and has ignited inflation. Since rising inflation is one of the Fed's main concerns, an unexpected hike in inflation is likely to make the Fed think twice about aggressively cutting rates again on March 18.

From the European side, the only factor holding the EUR from assaulting on new highs is the presumption that slow growth in the U.S. is beginning to affect the European community. Continue to monitor the markets for any sign of action by the ECB regarding interest rates. Watch for any slowdown in economic growth in the Euro Zone area to fuel the possibility of a rate cut in the short term. The European financial markets are anticipating at least two cuts after April. Based on how the market traded the past few days, the downside risk appears to be in holding Dollars.

Besides the U.S. CPI number, a surprise in the market could come in the form of bond insurer news. This is a day-to-day or perhaps an hour-to-hour event as key bond insurers await some kind of news regarding funding or a full-blown bailout. This is a potentially explosive situation as some of these insurers may be risking failure.

Overall, expect early volatility on the release of the CPI number and more later in the day following the release of the Jan Fed minutes. These two events are not likely to cause a change in the downtrend in the Dollar, as traders are likely to resume the uptrend in the EUR due to the deterioration of U.S. economic growth and more credit problems.

Technical Commentary: The EUR completed a .618 retracement of the break from 1.495 to 1.444 at 1.476. The market now has to hold the 50% price at 1.469 on a retest. Holding this area is likely to trigger a breakout through 1.476. The new minor swing bottom is 1.461. As long as we stay above this price, the minor trend remains up. Short-term minor support is at 1.468. Look for buyers at this price. The major retracement area on the downside is 1.459. The key action to watch is to keep the minor trend trading in the direction of the main up trend. If the minor trend turns down, then we could go into a prolonged sideways trade.

GBPUSD – The planned nationalization of Northern Rock over the weekend leaned on the GBP most of the NY session. Concerns over future BoE actions also weighed on the market as traders try to determine the GBP's next move. Traders have been trying to figure out whether the financial market instability will force another rate cut, or if a slew of stronger-than-expected economic reports is signaling too much inflation. Talk surfaced today of the possibility of stagflation, i.e., slow economic growth and rising unemployment, possibly including recession. One of the key concerns at this time is the possibility of a slow down in consumer consumption. The focus on Wednesday will be on the U.S. economic reports, however.

Technical Commentary: The GBP could not hold the major .618 support at 1.952. This triggered stops and more selling pressure indicating a test of the minor bottom at 1.938 is likely, followed by a test of the main bottom at 1.934. The sell off on Tuesday makes 1.974 the new main top. The main trend remains down until this price is taken out. We have to regain 1.952 to start any support base building. If this does not happen, then expect more selling pressure over the short term. The only way to get bullish at current levels is if the market becomes oversold early and triggers a closing price reversal up. Otherwise, continue to look for selling opportunities on rallies.

USDJPY – With rates holding steady at 0.5% and key support at 105 still holding, traders seemed content with holding the USDJPY in a tight range. The fear of intervention by the BOJ is supportive at this time, as traders do not want to be caught short. On the other hand, a firm U.S. equity market continues to control the short-term direction of this market. Conflicting fundamentals are keeping this market tight. Watch for unexpected news or a technical breakout to the upside to trigger a short-covering rally.

Technical Commentary: Tuesday action shows us that 107.20 is key support in the short run. A failure to hold this level indicates a move to 106.78 is likely. A break to this area could attract buyers. The up move will be determined by the size of the buying, if any, at 106.78. Continue to look for choppy two-sided trading until the USD regains 107.88. If it can build support after breaking out at this level, then the next upside target is 109.11.

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