We now expect that the ECB will hike interest rates again in June. This implies that Trichet will be giving the market the nod at next week's meeting. In contrast, the Fed is not only expected to confirm steady policy this evening but Bernanke is expected to lay out reasons for the Fed funds rate to remain at its record lows for an extended period.

Potentially the most interesting part of the Fed's press conference today will be the inevitable questions regarding inflation. QE2 was triggered by Bernanke's fear of deflation and given the still benign levels of core inflation its continuance has been justified.

However, headline CPI has been driven higher by rising food and energy prices causing some degree of discomfort amongst Fed hawks. The weakness of the USD overnight reflects the assumption that Bernanke will successfully field any accusation that the Fed is overlooking inflationary risks. Due to the continued softness of the US economy, we do not expect the Fed to start lifting interest rates potentially until the middle of next year.

Relative yields have proved to be an irresistible draw for many currency pairs this year and look set to remain a dominant influence. AUD/USD has made new highs again overnight as stronger Australian CPI data has re-vitalised the debate about the next RBA rate hike.

For similar reason USD/CHF has been drawn to new lows and EUR/USD has been toying with the 1.4700 level overnight. Strong demand at yesterday's Spanish bill auction has reasserted the view that for the time being at least Spain is managing to hold off contagion from other peripheral markets.

Yields on Greek government bonds continue to soar reflecting the concern that the government will at some point restructure its debt. Yet as long as the Spanish bond market retains its composure a wave of potentially devastating pressure on EMU remains contained.

While we would argue that the broad based weakness of the USD this year is closely linked with the Fed's accommodative policy, US fiscal concerns could play a greater part in the USD outlook during the remainder of this year and into the US presidential election in 2012.

S&P warned this month that a US downgrade is possible in the next couple of years if the US does not take additional measures to reduce its deficit. In reality this may be difficult in the run up to an election suggesting that the USD may come under pressure from concerns over US supply.

We retain our medium-term forecast of EUR/USD1.5200 and look for the dollar index to head towards the 70.00 level in the weeks ahead.

UK GDP data

This morning's release of the Q1 GDP data will be the highlight of the week for sterling markets. The median of 0.5% q/q suggests that over the past 2 quarters there will be no net growth in the UK. Consequently it is unlikely that this release has the capacity to put an early BoE rate hike back on the agenda. This suggests that any post sterling upside may be limited. Above EUR/GBP 0.8945 may see towards 0.9020.

Disclaimer

This document is issued by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. incorporated in the Netherlands, trading as Rabobank International (“RI”). RI is authorised by De Nederlandsche Bank and by the Financial Services Authority and regulated by the Financial Services Authority for the conduct of UK business. This document is directed exclusively to Eligible Counterparties and Professional Clients. It is not directed at Retail Clients. This document does NOT purport to be an impartial assessment of the value or prospects of its subject matter and it must not be relied upon by any recipient as an impartial assessment of the value or prospects of its subject matter. No reliance may be placed by a recipient on any representations or statements outside this document (oral or written) by any person which state or imply (or may be reasonably viewed as stating or implying) any such impartiality. The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This document is for information purposes only and is not, and does not constitute or intends to constitute investment advice or any investment service as referred to in the Act on Financial Supervision. You must make your own independent decisions regarding any securities or financial instruments mentioned herein. You are advised to seek independent professional advice as to the suitability of any products and their tax, accounting, legal or regulatory implications. All opinions expressed in this document are subject to change without notice. Neither RI, nor other legal entities in the group to which it belongs accept any liability whatsoever for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. Insofar as permitted by the Rules of the Financial Services Authority, RI or other legal entities in the group to which it belongs, their directors, officers and/or employees may have had or have a long or short position and may have traded or acted as principal in the securities described within this document, (or related investments). Further it may have or have had a relationship with or may provide or have provided corporate finance or other services to companies whose securities (or related investments) are described in this document. The distribution of this document in other jurisdictions may be restricted by law and recipients of this document should inform themselves about, and observe any such restrictions. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of RI. By accepting this document you agree to be bound by the foregoing restrictions.

© Rabobank International, Croeselaan 18, 3521 CB Utrecht, The Netherlands

Source: Rabobank Group