EUR/USD continued its drop in European hours this morning as short USD positions continued to be closed on Friday's story of a possible Fed rate hike by the end of this year. While the USD also posted significant gains vs the GBP, CHF, CAD the AUD and NZD, the JPY performed better. USD/JPY edged down to the 98.25 area this morning before bouncing back to 98.60.

There was no new news this morning to strengthen the market's expectations that the Fed could raise interest rates by the end of the year, but the impact of this story has been widespread. Asian currencies such as the KRW, INR and the IDR have all fallen vs the USD on the back of the US recovery story in addition to the moves registered by the majors. News that S&P has cut its Ireland rating provided some EUR negative incentive as did the worse than expected German April factory orders data (-37.1% y/y). However, scheduled data was thin on the ground.

The UK market continues to cautiously watch the political arena. PM Brown has held on to his job over the weekend, but the results of last week's European election have brought Labour its worst post-war result highlighting the public's dissatisfaction with the present government. This morning has seen another government minister leave office. Jane Kennedy has gone reportedly as a result of her refusal to pledge support to the PM.
Tonight's meeting between Brown and Labour MPs will be crucial in determining how much support there is for the PM within the Labour party. Right now it seems possible that the PM will find sufficient support to keep his job, at least for now. While the situation is still very uncertain, cable's strong loses this morning can be linked to general USD strength. EUR/GBP has edged lower suggesting that some of last week's shock on the political front has slipped out of the price.

The Latvia lats appreciated sharply this morning following last week's heavy sell off. Strong policy measures from the gov't and central bank to prevent devaluation have resulted in an IMF loan and helped pare down the devaluation risk. EUR/SEK has continued to edge higher on continued nervousness.

There is no scheduled US data today.