Releases from Europe:
 
April                       Forecast   Actual
French CPI   (MoM)    +0.4%    +0.3%
French CPI   (YoY)     +3.0%    +3.0%

The first CPI number is out the way with this morning but brought no new nasty surprises to work with. No prizes for guessing that energy and food prices are still the driving force but with the number basically in line with forecasts the status quo with rates is likely to remain unchanged.

The following economic releases are due today:

April
Italian CPI                        (MoM)   +0.1%
Italian CPI                         (YoY)   +3.3%
U.K. Jobless Claims Change              0.0K
U.K. Claimant Count Rate                2.5%
U.K. BOE Quarterly Inflation Report
U.S. CPI                           (MoM)   +0.3%
U.S. CPI                            (YoY)   +3.9%
U.S. CPI ex food & energy  (MoM)   +0.2%
U.S. CPI ex food & energy   (YoY)   +2.4%

May
Bloomberg Global Confidence 

Today is inflation day with release due from France, Italy and the States. If the U.K.’s experience with the shocking PPI report on Monday followed by yesterday’s rise in CPI to 3% is any role model for what is to come, then we could be seeing some firm CPI numbers also.

So far the market has viewed this from the angle of interest rates, a high inflation number implying that central banks will find it tough to lower rates. Monday’s PPI numbers boosted the Pound but yesterday’s CPI actually had the opposite impact.

That doesn’t really imply that the Euro will mimic this response since it still doesn’t face the large drop in house prices and has not suffered so badly from the credit crisis.

However, taking a step back should we question the normal reaction that higher inflation will mean that interest rates must remain firm? U.S. CPI is expected to be at 3.9%. For sure it is much too high for the Fed’s comfort. However, viewing it from the opposite perspective, would it have been any lower if the Fed had kept rates much higher?

I very much doubt it.

So is there any difference between the U.S. experience and the rest of the world? Well, certainly the housing market and the credit crunch have had a much greater impact on the U.S. economy than Europe.

Certainly the ECB cutting rates by 2% is just not realistic. However, as global demand slows because of externally generated inflation and not domestic demand generated inflation, consumers are implementing household budget cuts. This means that demand will be low and the potential for inflation to be worsened by interest rate cuts is actually moderately low.

Indeed, the route that central banks are currently taking in retaining a modestly high level of interest rates will definitely cause more business and consumer pain. It may be possible that unchanged interest rates will cause more damage than good…

Note important support and resistance areas:

           USDJPY       EURUSD       USDCHF        GBPUSD
Res:  106.34-82    1.5490-20    1.0679-25    1.9500-50
Res:  105.27-61    1.5445-70    1.0623-30    1.9430-50

Spt:   104.00-40    1.5350-90    1.0476-00    1.9382-90
Spt:   103.30-60    1.5289-29    1.0389-04    1.9300-35

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