There was little economic data out yesterday, so it was perhaps surprising that it was the day that the Euro finally broke through the 1.60 level against the USD. The Euro has been lurking with intent just under this level for a few days, and it took comments from an ECB official to finally push the single currency over. The markets have been expecting a rate cut by the ECB at some point this year, but the comments from Yves Mersch that he is "....surprised that various market analysts still consider an option that is in no way required in the current environment, namely a rate cut", have reversed these expectations and gave the Euro a boost. Mersch may have a point, inflation is still high at 3.5%, and Mersch thinks that the growth forecasts for the Eurozone are too pessimistic. However the Euro couldn't hold above this level as other European officials have commented on the strength of the Euro this morning, calling for closer cooperation with US, Japan and China to contain 'excessive' currency volatility.

Mersch's comments also pushed Sterling down to below 1.25 against the Euro, in spite of comments from Tim Besley an MPC member, who thought that the central banks actions to ease the liquidity crisis would allow the central bank to focus on inflation and ease the need for further rate cuts. This has helped the Pound upwards against the dollar and it almost breached the 2 level again, before worries over the implications of today's MPC minutes have brought the rate down to sit below 1.99.

The Euro and the Pound's rise against the Dollar was helped by yet more bad news on the US economy has both existing home sales, and manufacturing fell. The further indication of economic slowdown also helped the Aussie Dollar climb to a new 24 year high, boosted on the back of an exceptionally high CPI figure, which came in at an annual rate of 4.2%. the AUD has been boosted by yet more increases to industrial metal prices, rising agricultural prices, and the removal of expectations of rate cuts this year. The Aussie Dollar hit a new high over 0.95, and the Pound has slipped against the AUD falling to below 2.09.

We finally get some UK data out today and the MPC minutes from March are likely to be on the Dovish side. It is likely that every member will have voted for a rate cut, with the noted dove Blanchflower, and possibly one or two others, voting for a 50bp cut. Further signs that a rate cut is possible will leave Sterling vulnerable, particularly if tomorrow's retail sales are as weak as many fear.
The other data out today is PMI services and industrial orders, but with the ECB in hawkish mode the Euro may not be all that vulnerable to the odd weak report.

Michael Corcoran - Assistant Manager |Treasury Solutions | nabCapital | A division of National Australia Bank Limited


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