Source: Rabobank Group

EUR/CAD and EUR/AUD have been broadly range bound since the middle of last year. This illustrates the impact that the weaker USD has had in pushing AUD/USD to its present highs and in drawing USD/CAD down to current levels.

The ability of EUR/USD to hold above the 1.40 level in spite of the Eurozone's ongoing peripheral crisis is also linked with the softer stance of the USD. The dollar index hit a new 15 month low last week and is currently trading just above it. Clearly the direction the USD takes through the rest of the year will be instrumental in dictating the direction of the FX market and this week's payrolls data combined with the more hawkish stance of some Fed officials are providing the market with some clues.

Remarks made by the Fed's Bullard earlier this week and Hoenig last night have had the impact of strengthening market views that the Fed will not be embarking on QE3 after the present QE2 comes to an end in June. The market is currently beginning to ponder the potential for higher rates by year end and a decent payrolls number on Friday will likely push this view further. We see no scope for a Fed rate hike until year end, however, firmer rates in the US brought about by either a better payrolls number or as a consequence that Fed may no longer be buying treasury debt may lend the USD some support.

For the AUD and the CAD the outlook remains good. Support will continue to be drawn from strong economic growth and commodities demand particularly from countries such as China and India. A better tone in the USD, however, could slow the trajectory of further upside in these currencies vs. the USD though we continue to forecast further gains for the AUD and the CAD vs. the USD medium-term.

Ireland faces the music - again, EUR higher

At 15:30 GMT this afternoon, Ireland is due to announce the size of the black hole its banking sector is staring at. Dublin is hoping that this announcement will convince investors the there will be no more negative surprises and that it can avoid a debt restructuring.

The market is sceptical on both these points. The Irish banking/sovereign crisis will continue to play out for some time yet as will the fiscal crisis in Portugal. The EUR, however, continues to shrug off most of these issues. EUR/USD has edged higher this morning amid reports of good demand.

Support is being derived from hawkish remarks from the ECB's Stark on the inflation fighting responsibility of the central bank. These are a reminder that the ECB is very likely to hike interest rates next week.

Understandably there is a healthy debate ongoing in the market as to how far the ECB can push up rates this year in view of the peripheral crisis, but the market is prepared for potentially up to 3 ECB rate hikes this year which implies that the upward trajectory in EUR/USD can be sustained. The sovereign debt crisis still has the potential to provide stumbling blocks for the EUR, but we are looking for a grind higher towards EUR/USD1.45 on a 6 mth view.

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