Will the ECB raise interest rates beyond July? (page 2 of 2)

That is why they have been telling us that a 25bp rate hike is the appropriate expectation for the upcoming monetary policy meeting. They have also been warning that they are not planning a series of rate hikes.

However the ECB may have to backtrack on these words given the recent economic reports. There are three possible scenarios for the upcoming interest rate decision that have been outlined in our ECB Preview.

The ECB will most likely raise rates by 25bp and leave the door open for further rate hikes, but we wouldn't rule out a 50bp rate hike or what the ECB has hinted all along, which is one rate hike and that's it for the year.

Sterling falls victim to weak economic data

The British pound has been plagued with bad news this week.

Not only did consumer confidence plunge and activity in the manufacturing sector contract even further, but construction sector PMI fell from 43.9 to 38.8, the lowest level since the survey began in April 1997.

The housing market has long been the Achilles heel of the UK economy and this latest number tells us that there is no respite in sight.

Service sector PMI is due for release tomorrow and if that deteriorates further, the UK economy as a whole may be at risk of falling into a recession.

Australian Dollar surges on strong retail sales report

The Australian, New Zealand and Canadian dollars strengthened against the greenback thanks to better than expected economic data and higher commodity prices.

Crude oil prices closed at a new record high above $143 a barrel while gold prices are closing in on its three month high.

Despite the dovish comments from the Reserve Bank of Australia yesterday, retail sales were much stronger than expected. Consumer spending rose 0.7%, the strongest pace of growth since November 2007.

This is largely due to higher food and gasoline prices since sales at department stores were actually down 0.8%. Australian service sector PMI and their trade balance are due for release this evening. Given the drop in manufacturing PMI, service sector growth is likely to be nonexistent.

USDJPY: Prime for a breakout

The US dollar has been consolidating against the Japanese Yen for the past three trading days and judging from the price action of the currency pair, it is prime for a breakout.

The non-farm payrolls report provides the perfect catalyst for a break so expect some interesting price action in the currency pair over the next 24 hours. Despite the 166 point drop in the Dow, the Yen crosses have been mixed with most of the pairs rising except for USD/JPY and GBP/JPY which have been hit by weaker US and UK economic data.