The pound had a mixed day yesterday at the start of the trading week ahead of the publication of a raft of UK data due out over the next four days.
It is struggling to hold on to the gains of last week after the publication of the quarterly inflation report from the Bank of England which brought forward the expectation of an interest rate rise in the UK from February 2012 to December 2011.
The euro recovered from a shaky start as the markets focused on the possible impact of the arrest of the IMF chief Dominique Strauss-Kahn on the region’s efforts to contain its debt crisis. In the end, the pressure on the euro proved short lived as it received a boost after data showed euro zone inflation reached a 30 month peak in April prompting speculation the European Central Bank (ECB) may consider increasing euro zone interest rates again as early as July.
The euro also benefited after EU finance ministers gave the green light for a €78 billion bailout for Portugal and increased pressure on Greece to take more steps to address its debt problems.
The US dollar fell yesterday as President Obama warned of a new financial crisis if the US defaults on its debt as the US moves ever closer to a $14.3 trillion debt ceiling which Congress needs to increase in a matter of weeks to prevent the government defaulting on its borrowings for the first time in history.
Congress is struggling to reach an agreement to lift the limit, which was made law in 1917, because America’s debt has become a sharp dividing line between the two parties and will be in next year’s presidential election. John Boehner, the Republican leader of the House of Representatives, wants The White House and Democrats in Congress to agree to trillions of dollars in spending cuts before Republicans give the nod to any increase.
Overnight saw the publication of the minutes of the May meeting of the Royal Bank of Australia (RBA). Analysts suggested that RBA board members noted the significant divergences between different sectors of the economy presented challenges for policy-making, but that monetary policy had to be set for the needs of the overall economy. This analysis led to three of the big four Australian banks predicting that the RBA will increase interest rates next month which would give the AUD$ a further boost and is likely to send it back up to challenge its recently obtained 29 year highs against the USD$.
Commentary by Tony Redondo
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