Morning Currency Wrap for Friday January 14, 2011

Trichet, The Hawk, Is Back?  - The Euro has pulled back from one-month highs but is close to making its biggest weekly gain against the USD in almost two years on speculation the European Central Bank may need to raise borrowing costs as German inflation accelerated to the fastest pace since 2008. The inflation rate, calculated using a harmonized European method, increased to 1.9% from 1.6% in November, the Federal Statistics Office in Wiesbaden. In the month, consumer prices jumped 1.2%, the biggest gain since December 2002. Yesterday, ECB President Jean-Claude Trichet ignited a strong rally in the Euro after he signaled that he is prepared to raise interest rates and today council member Axel Weber said inflation risks could increase. However, let's not lose site of the fact that the severity of the euro zone's debt problems persists, which can be seen it the charts after a bearish signal flashed yesterday due to the 55-day Euro/USD moving average crossed below the 100-day moving average. Staying with the inflation theme, China raised banks' reserve requirements by a further 50 basis points today, it's seven increase in the past year, in its latest move to fight inflation. China's inflation rate jumped to a 28-month high of 5.1% in November. Mindful of the political turmoil linked to past bouts of inflation and recent rioting in some African countries over the rising cost of food, as Beijing doing all it can to combat rising prices. In Asia, the Yen was little changed against the USD but the AUD was hit the most, given Australia's close links to China in terms of the shipment of commodities. In Canada, the CAD had its first major set back in nine days against the USD after China's latest moves to combat inflation fanned expectation that Beijing's appetite for buying commodities could lessen. Today's key news items are U.S. inflation and retail sales data and a Thomson Reuters/University of Michigan's reading on consumer sentiment. Market players will be awaiting the Bank of Canada's interest rate decision next week, with particular focus on the tone of central bank chief, Mark Carney, which may provide further direction for the currency.