Talking Points

  •  Japanese Yen: Mixed Across The Board
  •  British Pound: Inflation Climbs to the Highest Level Since April
  •  Euro: Rallies Against All Major Currencies on the back of Risk Appetite
  •  U.S. Dollar: Empire Manufacturing on Tap

The British pound extended its gains against most major currencies on Tuesday as U.K. consumer prices rose an annualized 3.7 percent in December after climbing 3.3 percent the month prior amid economists' expectations of 3.4 percent. Inflation in the U.K. now stands at its highest level since April of 2010 and will likely remain above the Bank of England's 3 percent limit in the near term due to the increase in value added taxes. It is worth noting that core consumer prices which include food, energy, alcohol and tobacco prices advanced an annualized 2.9 percent. Today's release is of great importance due to the fact that it precedes the Bank of England minutes which will be released on January 26th. Indeed, the central bank kept its key overnight lending rate and asset purchase target unchanged at 0.50 percent and 200 billion pounds for the month of January. In turn, the minutes will provide market participants with color to the bleak picture as policy makers stand ready to respond in either direction. All in all, the British pound is likely to continue its northern journey in the short term, but traders should caution a much needed correction in the currency, which may come on the back of the jobless claims report which will be released tomorrow at 9:30 GMT.

Meanwhile, the euro pushed higher against all of its major counterparts during the overnight trade as risk appetite continues to regain its footing in light the earnings season and continued speculation that the euro zone finance ministers will expand the region's financial stability fund. However, yesterday's meeting among a smaller group finance ministers failed to produce an agreement surrounding the increase of the lending capacity. As debt contagion fears linger, failure to calm market concerns may lead the euro to revisit the 1.33 area. The economic docket during the European trade showed that economic sentiment in the 17 member euro area rose to 25.4 in January from 15.5 the month prior.

Taking a look at the news wire overnight, Spain sold 4.50 billion euros of 364 day bills at a yield of 2.947 percent which was lower than the 3.449 percent at its previous auction in December. At the same time, the country sold 518-day bills at a yield of 3.367 percent which also lower than the yield at its previous auction. The successful sale bodes well for Spain as traders previously speculated that the country would trail Portugal and possibly tap into the EU-IMF life line. However, it is worth noting that the European Central Bank is the likely purchaser of these bonds. As European policy makers aim to restore confidence via possible stress tests and talks surrounding increasing the EFSF, the euro will likely continue to rally in the short term. In addition, comments by ECB head Jean-Claude Trichet suggests that he is becoming increasingly concerned about the inflation outlook, which has provided upward pressure onto the euro; however, inflation risks in the bloc are likely temporary. Going forward, I expect the single currency to come back under pressure in the coming months as governments implement tough austerity measures in order to battle their high budget deficits.

The greenback lost ground on Tuesday, with the USDJPY extended yesterday's losses to reach an intraday low of 82.35. As technical indicators are beginning to paint a bearish picture, thus, traders should not rule out additional losses in the pair. Heading into the North American session market participants will place the spotlight on the U.S. empire manufacturing and Canadian interest rate decision which will be released at 13:30 GMT and 14:00 GMT respectively.

Will the EUR/USD retrace the advance from September? Join us in the Forum

Related Articles: Weekly Trading Forecast - 01.17.11

To discuss this report contact Michael Wright, Currency