Robust US consumer confidence data was the latest buy signal for the US dollar, taking the currency close to three-year highs against a basket of currencies. Investors continue to pile into the greenback, extending long positions in anticipation of a hawkish Federal Reserve this week. At six-week lows, the British pound could rebound against its US counterpart, assisted perhaps by this week’s UK inflation data, government borrowing numbers and Bank of England minutes which may underline a steady central bank. The euro could stay in the firing line though and fall below recent five-week lows versus the US dollar if Thursday’s important eurozone PMI surveys point markets in the direction of more European Central Bank monetary support.

Sterling

Sterling’s struggles against a much stronger US dollar may come to a pause this week. Analysts expect to see a decline in UK government borrowing data coupled with something of a recovery in British retail sales numbers. The two may offer markets evidence that fiscal policy in the UK is working. Should minutes from the latest Bank of England meeting also indicate steady monetary policy, sterling may find enough interest from investors to rebound. Fresh uncertainty about Britain’s EU membership significantly undermined the pound last week, a factor that helped force sterling down to six-week lows. However, there were some positives that helped keep sterling from a steeper fall.

US dollar

The US dollar opens the week close to three-year highs against a basket of currencies as more and more investors rush to be holding long positions in the US currency ready for when the Federal Reserve finally turns hawkish on monetary policy. Fed Chairman Ben Bernanke will be speaking about the US economy on the same day the Fed will publish minutes from its earlier policy meeting. Any hints that economic data is pushing the Fed towards reducing its monetary stimulus programme could take the US dollar to new heights. However, the greenback also appears be overstretched on a technical basis, meaning that if Bernanke insists that quantitative easing will continue to run for some months yet, the US currency could be pulled lower.

Euro

The euro could face another difficult few sessions ahead of key PMI data on Thursday. PMI surveys covering Europe’s manufacturing and services industries are expected to show yet another month of declining activity, a trend which the European Central Bank may look to counteract with more monetary policy action at its next meeting in June. The euro sank to five-week lows against the US dollar last week after first quarter GDP estimates revealed the euro area suffered a record sixth consecutive quarterly contraction.

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