Playing policy potential

The bigger risk events for currency markets fall into the latter half of the week, meaning that for now majors are constrained to relatively tight ranges with little impetus to breakout either side. The most notable move overnight has been with the Aussie. There were some fears that the RBA Governor Stevens could be more vocal on the currency in a schedule speech. As it was, there was no change in tone, which resulted in a modest relief rally on the Aussie.
That said, the 0.95 level will continue to offer tough resistance, as this is now seen as the line in the sand above which the RBA is likely to become more pointed in its remarks on currency strength.

For today, US CPI data is the main focus. The recent price action has shown the dollar becoming more sensitive to short-term interest rates as the discussion regarding the timing of the first Fed rate hike becomes more open. This was in evidence last week as Fed Chair Yellen gave her testimony in Washington. Both headline and core CPI rates are seen steady at 2.1% and 2.0% respectively, with stronger data more likely to push EURUSD below the low for the most at 1.3491.

Elsewhere, interest rate dynamics are also suggesting more consolidative activity on sterling, with 2Y rate spreads (UK minus US) have unwound half of the move seen after the change in tone from the BoE earlier last month.
EURGBP still looks to be the better cross to look for sterling strength should the data continue to come out to the firm side (GDP on Friday), given the growing dollar sensitivity to data and Fed rate hike prospects.

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