EURUSD – U.S. inflation heated up last month as reported in the January CPI report released at 8:30 EST. As expected food and energy were the reasons for most of the gain, but concerns that inflation is creeping into other sectors of the economy is becoming a concern. The two sectors which showed unexpected inflationary gains were apparel and hotel services.

The USD rose after the release as aggressive speculators saw it as reason for the Fed to slowdown its efforts to stimulate the economy by aggressively lowering interest rates. Expectations at the time were that with inflation accelerating, the Fed would be less aggressive. Looking at the numbers, U.S. consumer prices rose a seasonally adjusted 0.4% in January. The core CPI that takes out food and energy rose 0.3% in January. This was its biggest rise since June 2006. After early speculation that these numbers may dampen future interest rate cuts, Dollar sellers surfaced once again on the theory that the Fed was more concerned about financial turmoil than inflation at this time in the economic cycle.

This type of thinking proved to be somewhat true following the release of the January Federal Reserve minutes as the Fed once again emphasized that it was more concerned about avoiding a prolonged economic slowdown rather than fight inflation. However, the Fed did say that once the economy stabilizes, there would be a rapid reversal of the recent rate slashing policy. The Fed also emphasized that even after a 1.25 basis point cut in rates over an eight-day period that downside risks do exist.

Key highlights from the minutes included:

U.S. growth rates cut to between 1.3% - 2.0% in 2008 compared to 1.8 – 2.5% forecasted in October with more emphasis on the middle of the range than on the extremes.

U.S. inflation is forecasted at 2.1 – 2.4 percent. Up from 1.8 – 2.1 in October.

U.S. core inflation is forecasted at 2.0 – 2.2 percent. Up from 1.7 – 1.9 in October.

U.S. jobless rate is forecasted at 5.2 – 5.3 percent. Up from 4.8 – 4.9 in October.

Bearish concerns about the housing market correction, tighter credit conditions, and financial market turmoil

From these projections, it is clear that the Fed is expecting inflation to heat up while growth slows. This does not seem to put any confidence in the current monetary policy. The Fed is walking a thin line as far as future interest rate cuts are concerned. It seems they feel that as long as they have inflation somewhat corralled, they can keep cutting. The key seems to be inflation, particularly in food and energy. Higher prices in these two sectors may curb consumer spending in other areas. This could lead to a consumer led recession. Currently it looks like we are in for a period of stagflation caused by rising inflation and slow growth. This does not bode well for the USD in the long run.

Europe watched the U.S. reports with great concern today as they anticipate fighting similar problems in the near term. The ECB is already making a stand against inflation; however, any sign of economic slowdown will force them to cut rates also.

Technical Commentary: The EUR broke down near 50% support at 1.4596 and found buyers. The close near the high indicates the possibility of the rally continuing tomorrow. The major support remains 1.46137 and 1.46101. Look for the market to challenge a high at 1.47567 and the .618 price at 1.47562. A breakout above these prices clearly puts the EUR in a strong prolonged uptrend.

GBPUSD – The GBP fell to one-month lows against the Dollar following the release of the BoE minutes for January. The minutes showed by an 8 to 1 margin that they were more concerned about an economic slowdown than inflation. This puts them on the same page as the Fed. Like the Fed, they seem to think that they have more control over inflation than stimulating growth. This makes sense especially if the slow down is triggered by the consumer. The market believes that the BoE is facing a difficult task at this time. The key is finding a balance between controlling inflation and stimulating growth. Traders bet heavily against the BoE pulling this off by punishing the Pound today. UK reports retail sales tomorrow at 5:30 EST. An increase of 0.3% is expected following a decrease of 0.4% last month.

Technical Commentary: The GBP reached a new low for the month and is in a position to challenge the low for the year at 1.93367. A failure to hold this level could attract new sellers with an ultimate objective of 1.91034. The main trend remains down until 1.97364 is taken out. There is no sign of a bottom at this time, but because of oversold conditions, the market is poised for a profit-taking closing price reversal. All rallies look to be selling opportunities until the main trend turns to up.

USDJPY – An early session stock market rally supported the USD against the Yen as traders fueled the rally by taking on more risk. The U.S. equity market continues to control the short-term direction of this market. With the equity markets consolidating, continue to look for a sideways trade. If economic fears take over once again, and the stock market drops, then look for the Yen to break toward 105. It will be tricky being short at that level as the market is anticipating a BOJ intervention on such a break.

Technical Commentary: 107.20 is still 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.

USDCHF – The CHF seems to be tied tight to the U.S. equity market at this time. As long as the equity markets remain strong, then expect the USD to gain on the Swiss.

Technical Commentary: The USDCHF is still holding support at the 50% support at 1.091. A failure to hold this price could trigger further selling to the .618 retrace at 1.087. Buyers are likely to surface if this price is tested, as this is a value zone. The main trend turns up on a move through 1.110. This is the acceleration point to the upside. Until this occurs, look for choppy two-sided trading. Short-term resistance remains at 1.099.

USDCAD – There was little change in the USDCAD today following the release of the U.S. CPI data. The sharply higher move against the Canadian dollar these past few days may have been enough for the market at s this time. Expectations are that any more weak Canadian economic reports will further deteriorate the Canadian Dollar against the USD. The Bank of Canada is in control of the whole situation, and is likely to cut rates at its next meeting on March 4. Any bearish reports prior to this meeting could trigger a surprise emergency cut.

Technical Commentary: The main trend is up, but the market reached an important upside objective at 1.019 on Wednesday. This .618 retracement point attracted sellers, and the market posted a closing price reversal down. A follow-through break through Wednesday's low confirms the reversal top. The next downside objective based on this set up is 1.005. If the trend has truly turned up, then look for buying at 1.005. Regaining 1.013 will put the market in strong position once again, but today action indicates that traders are more likely to buy dips then breakouts.

AUDUSD – Profit takers hit the market today following the recent run up. Despite the sell-off, traders expect the uptrend to resume after a normal correction. Without a change in RBA policy, any break down in this market is likely to be a buying opportunity.

Technical Commentary: Based on the strength of this formation, it looks as if the market is content with posting only one-day sell-offs. This was shown today as buyers came back late after spending most of the day on the downside. .9399 is now the key support. If the market does top because of overbought conditions, then in the worst-case scenario, .9055 would be the downside target. This scenario seems remote at this time, however. The fundamentals are supporting higher markets at this time.

NZDUSD – The rosy outlook in the economy is supportive for the NZD at this time. Continue to watch for this market to piggyback the strong gains in the AUD. There does not seem to be any breakout momentum in this market following new move highs, so look to enter the long side on breaks.

Technical Commentary: The lack of momentum on breakout rallies seems to indicate that buyers prefer to enter on dips at current levels. Minor support is .7917. A move through .8021 resumes the uptrend.

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