Strong Euro Could Delay ECB Rate Hike (page 2 of 2)

We are expecting service sector PMI and retail sales. Given the surprise improvement in the manufacturing PMI report, the market is forecasting similar strength in the service sector.

Whether or not this will help the Euro rebound will be dependent upon how bad Eurozone retail sales were in May. The sharp drop in sales in Germany that month has pushed expectations down to -0.5 per cent. The marquee event this week is of course the European Central Bank interest rate decision on Thursday.

The recent rise in the Euro could reduce the central bank's urgency to raise rates since a stronger currency automatically reduces inflationary pressures.

Meanwhile the Swiss franc gave back nearly all of its gains after consumer prices fell short of expectations in June. The annualised pace of growth increased from 0.5 per cent to 0.6 per cent instead of the market's 0.7 per cent forecast.

This should be a just a bump in the road however since the Swiss National Bank is still expected to lift interest rates next quarter.

British Pound Should Hold Near 26 Year Highs Going into BoE Rate Decision

The British pound hit another 26 year high this morning on the back of a stronger than expected construction sector PMI report.

In contrast to the US, the housing market in the UK has been extremely healthy. In fact the 60.1 print in the PMI index is the strongest in over three years. This indicates that not only are house prices accelerating, but the demand for residential buildings is increasing as well.

Manufacturers do think that they are reaching a top however since the future business activity index dropped to the lowest level in a year. The value of the British pound should remain high going into Thursday's interest rate decision.

Before that we do have service sector PMI which is expected to improve slightly in June. The market continues to be unfazed by the terrorist threats in London which is a testament to the currency's resilience.

Profit Taking Hits the Yen Crosses

The Japanese Yen is stronger across the board today after comments from Bank of Japan member Kiyohiko Nishimura. He hinted at the possibility of a rate hike by saying that 'keeping rates low for a long time is not prudent'.

We think that the market may have overreacted or the selling may be primarily due to profit taking because recent economic data indicates that the economy may not be ready for a rate hike. Besides that, there seems to be no real basis for the yen rally today.

There is no major Japanese economic data for the remainder of the week, which means that the moves in the Yen crosses will primarily be dependent upon the demand for carry trades.