GBP

PREVIEWING CHINA & UK INFLATION:

China and the UK; the 2 countries with the most worrisome inflation rates will release their January CPI on Tuesday. Chinas CPI (2:00 GMT) expected at 5.1%-5.3% y/y (highest since Aug 2008) from 4.6% in Dec, while UK CPI (9:30 GMT) expected at 4.1%-4.3% y/y (highest since Nov 2008).

TALK THAT China CPI would be dragged down by a possible adjustment in the weight of food from the current 34% could also help fuel equities higher. The share of food in US and UK CPI stands at 13.7% and 10.8% respectively. The expectation that a downside surprise in China CPI (regardless of reweighting) boosting equities rests on the rationale that the diminishing likelihood of further rate hikes reduces the risk of a Chinese hard landing. But markets require broader cooling off in bank lending and property purchases beyond retail price growth. One aspect of greater certainty is further gradual appreciation in the Chinese yuan, which rose 3.5% from Jan 2010 to date. Beijing's ideal arrangement would be the ability to maintain orderly currency appreciation of 2-3% per year without disrupting the external and domestic sectors. The latter can be attained with pro-active monetary policy management (ahead-of-the-curve tightening) in order to contain actual and expected inflation. EURGBP looming approach towards the 7-month trendline support of 0.8360, a break of which would technically pave the way for the 0.8050s (lowest since Oct 2008). EURUSD STILL SEEN at 1.3220.


Ashraf