UK CPI jumped sharply from 2.9% yoy to 3.5% yoy in January, exceeding BoE's target range of 2-3% and prompted BoE King to write a letter to Chancellor of Exchequer Alistair Darling. In the letter, King emphasized that the spike in CPI is temporary and pledged that the Committee is committed to taking whatever actions are necessary to ensure that the outlook is for inflation to remain in line with the 2% target. King pointed out three factors, including rise in VAT to 17.5%, surge in oil prices of 70% and sharp deterioration of Sterling, that boosted up inflation. Responding to the letter, Darling noted in the short run, temporary factors can cause measured inflation to move around, and acknowledged that the committee's remit allowed it to look past short-term movements in inflation.

Germany ZEW economic sentiment dropped from 47.2 to 45.1 in February but was way better than expected 41. However, Eurozone ZEW was disappointing by dropping more than expected from 46.4 to 40.2. ZEW President Wolfgang Franz said that economic activity is likely to move sideways, with only minor ups and downs. European finance ministers told Greece to prepare additional measures for spending cuts and taxes to reduce the massive government budget deficit by 4% point of GDP before seeking Eurozone nations to realize their pledge to help Greece for its debt. Luxembourg Prime Minister Jean-Claude Juncker, who led the Monday talks of European finance ministers, said Greece has agreed to take further action if it looks like it can't hit the target. Greece will report on the progress on March 16 and Eurozone finance ministers would then vote on whether tougher action was needed and would impose on Greece extra measures. However, regarding the call for more details about the rescue package, Juncker said it's unwise to have a public discussion of such instruments.

RBA minutes released today showed that policy markets consider current rates at 3.75% no longer exceptionally accommodative. A rosy economic outlook in the country doesn't guarantee fast pace of tightening and there are still other issues like sovereign debt fears in other parts of the world. But if economic conditions continued to improve as expected, further increases in the cash rate were likely to be necessary.

Looking at the dollar index, more rally is still in favor as long 79.57 support holds. However, note that the index has been losing momentum ahead of 100% projection of 74.19 to 78.45 from 76.60 at 80.86 as seen with bearish divergence condition in 4 hours MACD and RSI. A break below 79.57 support will indicate that a short term top is formed and deeper pull back could then be seen to 76.60/78.45 support zone before staging another rise.

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AUD/USD Mid-Day Outlook

Daily Pivots: (S1) 0.8851; (P) 0.8880; (R1) 0.8912; More

AUD/USD's rise from 0.8577 is still in progress and surges to as high as 0.8978 so far in early US session. Intraday bias remains on the upside and further rally could be seen. Nevertheless, strong resistance is expected at 61.8% retracement of 0.9327 to 0.8577 at 0.9041 to limit the rebound and bring another fall. Below 0.8873 minor support will turn intraday bias neutral first. Break of 0.8785 will suggest that rebound from 0.8577 has completed and will flip intraday bias back to the downside for retesting this support next. However, sustained trading above 0.9041 fibo resistance will dampen our view and put focus back to 0.9327 resistance instead.

In the bigger picture, we're still favoring the case that AUD/USD has already topped out in medium term at 0.9404, on bearish divergence condition in daily MACD. Deeper correction should now be seen towards 0.7702/0.8262 support zone, with 50% retracement of 0.6008 to 0.9404 at 0.7706, after completing the current rebound from 0.8577. However, break of 0.9327 resistance will invalidate our view and bring another high above 0.9404 before AUD/USD tops.