width=301Another day, another solid performance from the Euro which has now made a convincing break through US$1.36 to overnight highs of US$1.3686. The stars have aligned for the Euro in recent weeks amid lingering dept concerns of European peripherals; but it's amazing what a higher inflation reading and a couple of good debt auctions can do.

Recent weeks has seen European Central bank President Jean-Claude Trichet signal a willingness to raise interest rates should the need arise and this premise of tightening is certainly adding another element of strength to a currency that appears to be overextended. From a technical perspective we're seeing a mixed picture with price action crossing major milestones but also approaching overbought signals according to the Relative Strength Index which is moving closer to the '70' levels. Technical analysts believe an RSI reading of '70' or greater suggests a reversal of price action is imminent.

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Meanwhile it was also a solid night for the Aussie dollar which has once again crossed the grail of parity to overnight highs of 100.23 US cents. Strength in US equities kept sentiment buoyant at the expense of the US dollar - this helped higher yielding assets to drive higher. The local unit also outperformed other major counterparts and was also able to regain some ground against the 'in form' Euro with price action breaking the 73 Euro Cent mark.

Today local traders will be focused on 4Q consumer price data which is likely to show headline inflation rose to 3.0 percent from a previous 2.8 percent. The RBA's preferred measure of inflation which discounts price pressures on the higher and lower end of the scale is also expected to make a mild rise from 2.5 to 2.6 percent in 4Q. Importantly, today's release will not take into account the inflationary impact of Queensland's floods, hence may be seen as a tad stale in the eyes of the investors - however still an important view of pre-flood inflationary pressures, although we need to see a significant deviation from estimates to spark any major market movements on the Aussie.

A higher than expected reading of pre-flood inflationary pressures will be seen as a worst case scenario for the RBA which may suggest further tightening of monetary policy earlier than expected amid an expected upturn in pressures as a result of floods. Whilst it is true the immense cost the Australian economy will no doubt take a considerable chunk out of the near term growth - as the state of Queensland embarks on a cleanup of epic proportion, supply constraints and the stimulus induced rebuilding process will no doubt put considerable pressure on goods and services which will be the RBA's primary consideration going forward.

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