Key Points
USD remains soft after US data fails to provide boost.
EUR-JPY makes new highs.
The Bank of England's Quarterly Inflation report will be the main draw early today, with UK earnings and employment data also due.
Mortgage applications, housing starts, building permits and industrial production feature in the US.

Market Outlook
Trading was relatively subdued overnight, with the USD steadying after a soft session on Tuesday. EUR-USD probed up to the 1.36 zone after yesterday's US data failed to offset the firmer tone seen since Friday and has moved above this level in early European trading. The solid Q1 GDP performance in the Eurozone has also helped the EUR's cause. A pullback through 1.3550 would be needed to leave the USD back on a firmer footing. The 1.3627 May 7 high should offer resistance now, ahead of the 1.3680 late April highs. It will be interesting to see if today's US housing data reflects the recent trend of stabilisation (see below). The NAHB index (out yesterday) fell to a 15-yr low in May, with the weakness due to a tightening in lending rules related to the sub-prime fallout and the risk is that this could weigh on housing starts and permits going forward.

The EUR-GBP cross rate is still struggling to break clear of resistance at 0.6846-50, awaiting the BoE Inflation Report. Chances are that the BoE sees itself as ahead of the curve. If so, there will be some upside risk on EUR-GBP, but the 0.6867 mid-March highs will need to break to clear the way for gains towards 0.6920-60. Major GBP weakness looks unlikely, as we are not currently in a situation where rate hike prospects are significantly fading. A more hawkish stance would leave 0.6830 back under pressure for 0.6800-0.6780.

The JPY remained soft on the crosses overnight, following Tuesday's weak machinery orders reading. EUR-JPY eked out new highs above 163.62 briefly in early European trade. Trend risk is that 164 is seen on this move, given current momentum and the tone of tonight's GDP data could have some bearing on what happens from here. USD-JPY needs to break 120.50-60, while the AUD-JPY continues to flirt with 100.50. The tone of global markets will also be significant for investor risk and the performance of the JPY.

In Australia, the wage cost index rose 1.0% in Q1, below the 1.3% increase the market had been expecting. Growth in hourly pay rates ticked up to 4.1% y/y, from 4.0% in Q4, but held well shy of the 4.5% 'danger' level. The booming mining sector reports wages running above 6.0%, but private sector overall wage growth was just 3.9%. The numbers will be something of a relief for the RBA given that all the other data, except for CPI, has been on the strong side, but a tightening bias will remain in place. The AUD31.5bn of tax cuts promised in last week's 2007/08 Budget helped to boost the consumer sentiment index by 7.5% to 123.9, the highest since the survey began in 1975.

Day Ahead
Eurozone - the latest monthly Eurozone CPI data is due. Something unusual would be needed to trigger any market reaction, as both the headline and core indicators have been steady in recent months around 1.8% or 1.9%.

UK - the BoE's Inflation Report is the main focal point and especially whether (and how vigorously) it points to the likelihood of a further rate hike in the 2nd half of the year, such a move being already well priced in by the market. In the February Report the Bank forecast CPI at the 2% target in two year's time, but only on the assumption that interest rates were raised in line with market expectations (5.6% for Q3 being assumed on rates in that Report). This was slightly hawkish at the time, but with CPI forecast to be dipping below the 2% target in 2007 and again in the third year of the forecast, the Bank was clearly not in any state of panic about the outlook for inflation. Such elements of the report will again be examined closely, but it will be difficult for the Bank to present a more hawkish view than that already held by the market. The employment data and average earnings data will also be watched, especially the ex-bonuses element of the latter.

US - Housing starts have stabilised over the past couple of months after the sharp drop seen in January, but much more strength than this will be required to suggest a bottom. Building permits do appear to have stopped falling, which is one encouraging sign, but both the main home sales series (not due until the following week) have been showing weakness. The weekly data on mortgage applications is due today. Applications related to 'house purchases' (rather than 'refinancing') are currently at their highest level since early January. Caution is advised when looking at this data series, as mini-trends can often be reversed (e.g. the strength in mortgage applications in Dec and Jan quickly evaporated), so any market optimism will only build slowly and will depend upon such improvements being sustained over the next couple of weeks. The industrial production data for April is also due, a rebound by 0.3% m/m is forecast, after a decline of 0.2% in March. Utility use should have pulled back to more normal levels, mining activity rose and the manufacturing side should also have picked up

Diary
Data/event BST Consensus*
 
GB Claimant count (Apr) 09.30 -5.3k
GB ILO unemp 3m ave (Mar) m/m 09.30 21k last
GB LFS employm't 3m ave (Mar) m/m 09.30 -47k last
GB Average earnings (Mar) 3m y/y 09.30 4.8%
GB Earnings ex-bonuses (Mar) 3m y/y 09.30 3.6%
EU CPI (Apr) y/y 10.00 1.8%
EU CPI ex-energy/fresh food (Apr) y/y 10.00 1.9%
GB BoE Inflation Report 10.30
US Mortgage apps - purchases w/w 12.00 2.6% last
CA Net portfolio balance (Mar) 13.30 -C$1.3bn last
US Housing starts (Apr) 13.30 1480k
US Building permits (Apr) 13.30 1526k
US Ind prod (Apr) m/m 14.15 0.3%
US Capacity utilisation (Apr) 14.15 81.5%
JP GDP (Q1 1st est) q/q 00.50 0.7%
AU Average wages (Q1) q/q 02.30 0.7% last
NZ Cullen presents 2007/08 Budget 03.00
JP BoJ policy announcement unch
Latest data Actual Consensus*
US NAHB housing index (May) 30 33
US ABC consumer conf (w/e May 13) -7 -3 last
NZ PPI output (Q1) q/q -0.2% -0.5% last
AU Consumer sentiment (May) 7.5% -0.2% last
AU Wage cost index (Q1) q/q 1.0% 1.3%
CN Ind prod (Apr) y/y 17.4% 17.5%
JP Ind prod (Mar, final) m/m -0.3% -0.6%
JP Consumer confidence (Apr) 47.4 47.2 last
* Consensus unless stated