Key Points
JPY overnight recovery could extend further initially, but JPY crosses likely to be supported.
EUR-USD steady, cable still looking positive.
SEK can gain further after yesterday's revelations.
UK CPI, Eurozone ZEW surveys, US CPI, housing starts and ind prod feature today. NZ CPI due this evening.

Market Outlook
Most markets have gone on the defensive a little overnight, with Asian markets failing to add to the gains seen yesterday and the JPY and the CHF strengthening. A further pullback in the JPY crosses looks likely initially today, although ultimately there is likely to be good support on any dips with yesterday's strong equity gains suggesting that overall investor sentiment is positive and risk appetites are healthy. The 160.00-80 area is likely on EUR-JPY, while 118.50-119.00 is feasible on USDJPY.

EUR-USD progress remains steady and while an upside bias remains in place overall, a pullback to 1.3450-60 is feasible in the very short-term. Cable looks better supported after yesterday's strong PPI output data, which significantly reinforces expectations about a May rate hike. CPI is due today (see below for preview) although cable looks set to test 2.00 at some point this week. However, an initial pullback would look likely on any break of 1.9850-80.

Yesterday's US retail sales numbers were fairly decent, although the soft NY Fed number will maintain the impression that all is not well in manufacturing. However, the data is still not weak enough to warrant any policy easing and this will maintain some support for the USD. A recent positive for the EUR has been the steady firming in ECB rate expectations over the past month or so. Since the rate hike in early March the Euribor future for Dec has firmed 27bp to 4.33%. While the risks remain clearly to the upside for ECB rate expectations, much of the move may have been seen for now.

The SEK was boosted yesterday by the surprise revelation in the latest Riksbank minutes that one member (Oberg) had voted for a rate hike at the Mar 29 meeting. This runs counter to the sentiment that developed in February when the Riksbank guided interest rate expectations lower in its Inflation Report.

Expectations for 3-mth money in Dec are up around 8bps since yesterday's announcement to stand at 4.09% and are not too far from the high of 4.15% seen in January. Such expectations fell as low as 3.78% in early March. Yesterday's Budget was also an expansionary one and included government assumptions on interest rates (4.5% next year) that are well above those set out by the Riksbank (3.6% on average next year) in its February Inflation Report. The market is now left wondering whether they were right all along and that the Riksbank's dovish presentation in February was misleading. This is the danger of transparency. EUR-SEK has scope to fall further in the short-term, with some downside risk to 9.15-9.16 as long as it stays below 9.25.

Day Ahead
UK - March CPI is out this morning and the headline y/y rate has remained firm in recent months. The main factor on CPI in the months ahead is that the y/y rate should fall sharply in May, with the current core rate of 1.8% a better guide to where CPI may settle during the summer. However, it is clear that the MPC is primarily concerned with inflation pressure in the mediumterm as opposed to what happens in the coming months and such concerns will have been reinforced by yesterday's strong PPI output data. To this extent, a weak number today is unlikely to avert rate hike risks, but a strong number would clearly supplement such arguments.

Eurozone - ZEW surveys are likely to reflect the solid economic backdrop in place and the expectations components look set to gain further.

US - CPI, housing starts, building permits and industrial output are due. Key focus today will be whether the more subdued 0.2% outcome seen last month on core CPI can be repeated. Housing starts bounced back sharply in Feb, although this was only after the very steep fall recorded in January. However, given the way other March releases are panning out (employment and retail sales strength suggesting seasonal distortions for Feb) there may have been a further uplift in March, or an upward revision to February.

New Zealand - CPI for Q1 is released tonight and the more subdued y/y rate of 2.6% seen in Q4 is likely to have been maintained. However, the RBNZ is looking beyond the current softness in the headline y/y rate to overall medium-term inflation pressure and it seems unlikely that such concerns will be assuaged by this data. Last week's very strong retail sales data will help maintain expectations of the need for another rate hike.

Diary
Data/event BST Consensus*
 
GB CPI (Mar) y/y 09.30 2.8%
GB CPI core (Mar) y/y 09.30 1.8%
GB RPIX (Mar) y/y 09.30 3.7%
GB RPI (Mar) y/y 09.30 4.6%
EU Trade balance (Feb) m/m 10.00 ?0.6bn
DE ZEW expectations (Apr) 10.00 10.0
EU ZEW expectations (Apr) 10.00 8.0
US Chain store sls (w/e Apr 14) w/w 12.45 0.9% last
US CPI (Mar) m/m 13.30 0.6%
US CPI core (Mar) m/m 13.30 0.2%
US Housing starts (Mar) m/m 13.30 1495k
US Building permits (Mar) m/m 13.30 1500k
US Fed's Plosser spks on econ 13.30
CA Manu shipments (Feb) m/m 13.30 0.2%
US Redbook sls (w/e Apr 14) m/m 13.55 1.0% last
US Ind prod (Mar) m/m 14.15 0.0%
US Capacity utilisation (Mar) 14.15 81.9%
EU ECB's Trichet speaks 16.00
US Fed's Geithner on USD & EUR 17.30
US ABC consumer conf (w/e Apr 15) 22.00 -7 last
NZ CPI (Q1) q/q 23.45 0.6%
NZ CPI (Q1) y/y 23.45 2.6%
AU Consumer sentiment (Apr) m/m 01.30 3.7% last
Latest data Actual Consensus*
US NAHB index (Apr) m/m 33 35
JP Consumer confidence (Mar) 47.2 47.8
* Consensus unless stated