ECB in state of heightened alert (page 2 of 2)

However the simultaneous hawkishness of the ECB and the Federal Reserve is exactly what could keep the EUR/USD range bound for at least the next 24 hours.

Sterling hit by Dollar strength

Better than expected UK economic data has failed to help the British pound extend its gains for the fourth day in a row.

The RICS house price balance was higher than expected last month, suggesting stabilisation in the housing market. Meanwhile retail sales as measured by BRC also rose by the most in four months while industrial reproduction rebounded.

This should be welcome news for the Bank of England who, like the ECB, needs to concentrate on containing inflationary pressures.

If growth continues to stabilise, a rate hike may even be possible. However before that can even happen, we need to see an improvement in the labour market. Tomorrow, the UK will be releasing its employment report and trade balance. Given the drop in the employment component of the service and manufacturing PMI report, the pound may not receive support it needs from the employment numbers.

Bank of Canada leaves interest rates unchanged at 3%

To the surprise of the markets, the Bank of Canada decided to leave interest rates unchanged at 3.00% compared to the market's forecast for a quarter point cut.

Although growth contracted by 0.3% in the first quarter and consumer confidence fell to a seven year low, the prospect of higher price pressures has reduced the BoC's dovishness.

According to the central bank, 'if current energy levels persist, total CPI inflation will rise above 3% later this year.'

Therefore the current level of interest rates is 'appropriately accommodative.' On growth, the BoC is not too worried as they believe that the economy has moved into excess supply. As a result, they expect growth to pick up this year and accelerate in 2009.

The Bank of Canada was the last central bank expected to ease interest rates now that they too have succumbed to inflationary pressures.

USD/JPY hits three month high

The US dollar hit a three month high against the Japanese Yen as broad dollar strength led the currency pair higher.

The other Yen crosses did not fare as well however with the US dollar and the commodity currencies the only ones rising against the Yen while the Euro, Swiss Franc and Pound Sterling sold off.

Stocks have failed to extend Monday's gains and its vulnerability is affecting the Yen crosses. Tonight, the final numbers for Q1 GDP, the current account balance, the trade balance and CGPI are due for release - expect some action.