There are lots of things you can anticipate in this world, picking up little threads here and there and trying to pull them together into a piece of yarn. That’s why the bounce in UK inflation is so interesting, as there were so few clues. Even Mervyn King seems a bit mystified, pointing to Sterling weakness as a potential cause. This should serve as a cautionary factor for US authorities as dollar strength in recent months can be an added drag on prices, amplifying deflation risks.
The sudden focus on UK inflation combined with a breather in the reflation trade has prompted a good deal of deck-shuffling today. The pound is very firm while commodity currencies are well off recent highs.
EUR/GBP is down nearly 2 cents on the day, now below 0.9200 and EUR/USD is in the lower region of recent ranges. 1.3740/50 remains very strong resistance and bulls have to be a bit concerned that yesterday’s 7% rally in the S&P was insufficient to breakout to the top of the range. Therefore, be mindful of the potential for a deeper washout. 1.3480/85 and 1.3415/20 are supports on dips. Stops are particularly large below the latter level.
