Euro in the spotlight

The pound held up well yesterday as the latest UK inflation data confirmed that CPI fell 0.7% in January bringing the annualized level to 3.0% which is down slightly from Decembers 3.1%.  The 3.0% level is still well above the Bank Of England’s 2% target for inflation and this data suggests that interest rates may not need to be cut in March as previously thought.  However inflation will remain a concern for the Bank Of England-  Mervyn King has already signaled that inflation could fall sharply this year and todays BOE minutes will give us more insight to the sentiment of the MPC. 

The euro was the big loser in the currency markets yesterday falling to 2 month lows against the dollar and also retreating against the pound.  Ther is now real on the health of eastern European banks, with the threat of a downgrade in credit looming over eastern European subsidiaries of Swedish and Austrian banks, coupled with the expectation of more banking losses in Europe forcing the euro lower.  The EUR/USD moved to a low of 1.2548 and 1.25 is now the key target before a break to 1.2312. GBP/EUR failed to hold above a move back to 1.13 yesterday, however this will again become the target as the spotlight remains on the euro and its woes.

Overnight the final approval was placed on the US stimulus package of $787bn which is desperately hoped will kick start the global economy.  The urgency of Obama to introduce this stimulus was justified as General Motors and Chrysler have requested another $21.6bn on top of the $17.4bn already received.  This caused a sharp sell off in equities- in particular the Dow, as risk aversion kicked in. 

One to watch in the markets at the moment is USD/CAD which has broken a key resistance level of 1.26.  With risk aversion and the falling value of Oil, we could see this pair re-test the 1.30 level in the near term. 

The BoE minutes just released showed a vote of 8-1 in favour of cutting rates at the last meeting in Feb, with inflation still 1% above the target and a rallying outcry from ignored savers, it will be interesting to see the next decision in March…