Key Points
EUR-USD breaks above 2006 highs - upside risk in very short-term.
US CPI is today's main focal point, although next week's numerous US housing releases will be significant.
AUD also receives help from RBA comments - major area is at 0.7950-0.8000.
US Michigan sentiment and industrial output also due today.

Market Outlook
The USD has weakened overnight, with EUR-USD making a charge very early in the Asian session. Stops were triggered as recent highs at 1.3260 (Feb 27 high) and 1.3297 (2006 high from Jan 2) gave way. While EUR-USD remains above 1.3260 there will be some upside risk, with the Dec 4 high at 1.3367 the next big level ahead of 1.35. From a technical point of view it is worth going with the move for now, as the break through the aforementioned levels suggests some decent upside momentum. However, while recent US data has been slightly disappointing, it is far from clear that this will translate into a fresh and significant move against the USD. USD-JPY was also given extra downside momentum by the release of a stronger than expected tertiary activity index last night.

The key focus today is US CPI and the avoidance of a strong number is a minimum requirement to ensure some further stability in global markets (see below for preview). Also note that next week's US data schedule is dominated by housing data, with the NAHB housing index, housing starts, building permits and existing home sales all due. The market has been concentrating on the housing market for many months, but that focus will be sharpened even further by the recent concerns that have developed about sub-prime mortgages in the US. The status of next week's data could have a strong bearing on how sentiment pans out in the short-term.

Recent developments continue to raise question marks over GBP. If the EUR-USD break higher does coincide with further USD-JPY weakness, GBP is likely to continue underperforming against the EUR because of the risk related to more downside in GBP-JPY. It is not clear how long this will last, but there is risk up to 0.6890 on EUR-GBP in the short-term. Immediate resistance today is at 0.6867.

The AUD received some independent support form comments by RBA assistant governor Edey, who said that recent data meant continuing upside risk to underlying inflation. Major resistance on the AUD is at 0.7950-0.8000 and this may once again be difficult to break unless there is a major move against the USD. If such a break were to materialise it would be highly significant.

Day Ahead
US - CPI, industrial output and Michigan sentiment numbers are due today. Last month, core CPI was a strong 0.3% m/m, so the market will be anxious to see whether this was a one-off (i.e. a reaction to the softer 0.1% readings in each of the previous three months) or the beginning of a stronger trend. The University of Michigan measure of national consumer sentiment was weaker last month, so it will be interesting to see whether there is any rebound. The weekly consumer sentiment numbers have remained firm in recent weeks.

Diary
Data/event BST Consensus*
 
US CPI (Feb) m/m 12.30 0.3%
US CPI core (Feb) m/m 12.30 0.2%
US Ind prod (Feb) m/m 13.15 0.3%
US Capacity utilisation (Feb) 13.15 81.3%
US Michigan sentiment (Mar, prel) 14.00 89.0
Latest data Actual Consensus*
JP Tertiary index (Jan) m/m 1.6% 1.2%
FR Current account (Jan) -?2.8bn -?3.0bn