Morning Currency Wrap for Monday January 24, 2011

The Euro Takes Out Stops And Then Takes Breather  - Market players used tough talk on inflation pressures from European Central Bank chief Jean-Claude Trichet on Sunday to surge ahead against the USD to take out all the near by stop losses by Euro shorts. The lack of follow through demand allowed the Euro to take a breather after last week's big gains, which took it to levels last seen in November 2010. In a Wall Street Journal interview on Sunday, Trichet said core inflation was not a good gauge of future price pressures and that the central bank was ensuring higher energy prices do not seep into other prices. Trichet's hawkish comments were offset by negative political development in Ireland. The resignation of Prime Minister Brian Cowan as leader of the Fianna Fail party has plunged the country into political turmoil because it not yet passed legislation enacting the final measures from last December’s budget, which are needed in order to tap the EU/IMF bailout fund. The opposition parties have called on the government to fast-track the vote in order to clear the way for a general election in February rather than March 11. The lack of reaction to Ireland's news tells me that market players are starting to believe German Chancellor Angela Merkel when she says Europe’s biggest economy will do whatever it takes to save the region’s currency. Meanwhile, the GBP was down as market players are starting to doubt that the Bank of England will hike rates anytime in the next few months. Market players will be looking at the mine set of the BOE with regard to price pressures on Wednesday's release of BOE minutes. Elsewhere, the USD was up against the Yen as this will be a big week for U.S. economic news, Fed monetary decision, and President Barack Obama’s State of the Union address. In Canada, the CAD was little changed in overnight trading as the usual drivers of  U.S. equity futures were flat and commodity prices were mixed ahead of Tuesday's December CPI. Any weakness in the CPI will take the pressure off the timing of interest rate increases by the Bank of Canada, which could send the CAD lower.