Asia Session Recap

Are central banks shifting their focus from preventing a recession to controlling inflation? Last week European Central Bank President Trichet suggested that they could increase interest rates to quell inflation. Today in Asia Fed Chairman Bernanke made comments that the Fed could be shifting its focus to controlling long term inflation expectations. The USD gained against most currencies during our session as markets started to discount tightening as soon as this year. The implications for the currency markets have resulted in a tug of war that saw EUR/USD rally last week and sell off this week as volatility continues to make its way back into play.

Interestingly, EUR/GBP moved lower after Bernanke's comments. For the past year we have seen this pair steadily move higher on fears of the UK housing/credit woes. If we see improved sentiment concerning the UK economy, this pair could see further weakness. On the other side, EUR has played somewhat of a safe haven against a global slowdown and diversification out of the USD. Could the tide be turning?

Looking forward, it seems that governments are looking to take a coordinated effort to bring inflation expectations down. Will the EU or the Fed win? Given the recent Fed cuts, they could have more room to increase rates. It may be time to listen to an old adage: 'Don't fight the Fed.'

Upcoming Economic Data Releases (London Session)

• UK: (4:30am ET) Industrial Production (relevance: medium). (7am ET) Bank of England's King gives speech in London.

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