Key Points
EUR-USD consolidating above last week's breakout point.
Tomorrow's FOMC statement awaited, although this may fail to deliver dramatic softening in language.
JPY remains soft on further improvement in global markets. BoJ leaves rates unchanged.
AUD pulls back after brief foray above 0.80.
UK CPI, money lending, Canadian CPI, US housing starts, building permits and weekly consumer sentiment feature today.

Market Outlook
A fairly quiet overnight session with EUR-USD still consolidating after last week's break above 1.3260 and USD-JPY slightly firmer due to further tentative gains in equity markets and an unchanged BoJ policy outcome. The latter was of no great surprise and the remarks made so far by Fukui do not add that much to the policy debate, although the fact that he said that the BoJ must also keep an eye on land prices (were there are some modest signs of acceleration) and exchange rates, adds a slightly different dimension to BoJ watching. Otherwise, he merely reiterated that rates will be raised only gradually, that core CPI could turn negative in Feb and Mar and that consumer spending seemed to pick-up in January.

By and large the JPY will continue to trade in line with global markets i.e. stronger global markets, weaker JPY and vice versa, although major movements look unlikely today with tomorrow's FOMC statement still outstanding. There is a clear risk that the latter will fail to deliver a major softening in policy rhetoric. The main focus today will most probably be on the US housing data (see below for preview) as the strength or weakness of these numbers will have the potential to affect sentiment towards both the sub-prime mortgage issue and tomorrow's Fed statement. Yesterday's NAHB housing index slipped back to 36 from a revised 39 (originally 40) for February. The near-term technical bias remains to the upside on EURUSD with 1.3260-plus territory being maintained, although the Dec 4 high at 1.3367 should hold it for now and further advances could prove difficult unless there is some weaker data or the Fed softens its language.

The AUD strength seen late yesterday (including a move to 0.8030) was frustrated by the brief period of USD strength seen early on in the Asian session (moving back to 0.7962 at one point). However, it is back close to 0.80 at the time of writing and looking strong. The risks are clearly growing of a break above 0.80, although it is not clear that this will be able to proceed smoothly unless there is some further generalised USD weakness and this may well depend upon tomorrow's Fed statement. The price action is probably the best guide and any move above 0.8030 would probably spur some buying in the short-term. If a foothold can be established above 0.80 it may also trigger some hedging activity by Australian holders of foreign assets as well as exporters. With 0.80 having held the AUD for a number of years, many will have previously taken the view that hedging is not required, but this could change dramatically if a move through 0.80 occurs. Below 0.7960 and 0.7930 would significantly undermine short-term upside prospects.

GBP continues to edge higher helped by the softer JPY and tentative hopes about a business friendly UK Budget tomorrow. CPI data is due today (see below for preview) and anything unusual could generate some market impact. Below 0.6820 is needed on EUR-GBP to add credence to the view that a shortterm top has been established at 0.6860-70.

Day Ahead
UK - CPI and money data are due and CPI will be the main focal point for the market. Last month (for Jan) the headline CPI y/y rate fell to 2.7% from 3.0%, while core CPI eased back to 1.6% from 1.8%. Recent reports of lower utility prices have also raised hopes of a further significant drop in the y/y rate later in the year, with May the most likely month. The market is expecting a slight rebound in the key y/y rates for February.

Canada - CPI is due in Canada, although with core CPI having been reasonably steady of late around 2%, it will need to be dramatic to attract any interest.

US - more housing data due today in the form of housing starts and building permits. Housing starts weakened sharply in January, falling to their lowest level since 1997 and on the basis of purely statistical considerations a rebound seems likely. Indeed, if this fails to materialise it would suggest gross underlying weakness. Building permits have been trying to stabilise over the past few months, but remain at levels not seen since 2000-2001. Weekly data on store sales and consumer sentiment are also out. Last week's consumer sentiment number rose to a 5 ? year high.

Diary
Data/event BST Consensus*
 
IT Ind orders (Jan) m/m 09.00 -0.5%
GB CPI (Feb) y/y 09.30 2.7%
GB CPI core (Feb) y/y 09.30 1.7%
GB RPIX (Feb) y/y 09.30 3.5%
GB RPI (Feb) y/y 09.30 4.3%
GB PSNCR (Feb) 09.30 ?2.0bn
GB M4 (Feb) y/y 09.30 12.8%
GB M4 lending (Feb) y/y 09.30 14.6% last
GB BBA mortgage lending (Feb) 09.30 ?5.6bn last
CA CPI (Feb) y/y 11.00 1.6%
CA BoC core CPI (Feb) y/y 11.00 2.1%
US Chain store sls (w/e Mar 17) w/w 11.45 0.7% last
US Housing starts (Feb) 12.30 1450k
US Building permits (Feb) 12.30 1550k
US Redbook sls (w/e Mar 17) m/m 12.55 0.2% last
US ABC consumer conf (w/e Mar 18) 21.00 2 last
JP Market Holiday
Latest data Actual Consensus*
US NAHB housing index (Mar) 36 38
JP BoJ rate announcement unch unch
DE PPI (Feb) y/y 2.8% 2.8%