The NZD/USD hit a post float high breaking above the 7900 barrier after hotter inflation readings that printed at 1.0% vs. 0.8% on a quarter over quarter basis. The news triggered a new round of speculation that RBNZ may be forced to raise rates further to 8.25% in the near future as neither retail sales demand nor price pressures show any signs of a slowdown. The latest price action has also underscored the futility of RBNZ attempts at intervention. The unit now trades 400 points higher after action by the central bank to slow its ascent two weeks ago failed miserably. The New Zealand monetary authorities now find themselves in an uncomfortable position of ceding full control to the markets as kiwi appreciation has taken on all the markings of a runaway rally. Unless the currency markets are suddenly faced with a new wave of risk aversion, the kiwi is on a date with destiny as it steadily progresses higher towards a test of the key psychological barrier at .8000.

The pound also continued its winning ways with the unit coming to within a whisker of the 2.0400 level in early London trade. As we noted on Friday, “BoE chief economist Charles Bean made a series of hawkish remarks, stating that central banks should maintain focus on headline inflation data rather than core readings in order to better anchor inflation expectations. The news suggests that the UK central bank will continue to pursue a tightening course especially in light of $70+/bbl oil which is bound to keep headline numbers elevated, making 6% UK short term rates a strong possibility by the end of this year.”

The euro, too tried to retest its all time highs above 1.3800 but had difficulty doing so after the day’s economic data proved unsupportive. EZ CPI printed in-line at 0.1% and more importantly the core readings remained at 1.9% below the 2.00% self imposed barrier favored by the ECB. For the time being, the economic news suggests that the appreciating currency is acting as natural deflator in the 13 member region. The market therefore may be mispricing the possibility of 4.5% rates by year’s end as it appears likely that the ECB may raise rates only to 4.25% in 2007.

Calling tops in the pair has been a mugs game for the past few months, but the recent price action in the EUR/USD at the very least hints at a possible pause in euro’s rise. Although recent US economic data has been horrid, latest consumer survey readings along with the significant drop in gasoline prices suggest that US demand may pick up pace going forward. Meanwhile the expected monetary tightening for the euro may not materialize. Furthermore, our proprietary SSI reading show that we may be approaching a blow off top for the pair as positioning skew becomes progressively one sided. Given the massive momentum behind the surge in the EUR/USD, there is still some room for further appreciation in the unit, but caution is of the order as the rise looks increasingly tired.

Boris Schlossberg is a Senior Currency Strategist at FXCM.