Key Points
ECB meeting supporting EUR, but it could be an anti-climax. EUR-USD downside favoured.
AUD boosted further by strong data.
ECB meeting, US unit labour costs feature today - RBNZ rate announcement, Australian labour data due tonight.

Market Outlook
The USD remains soft against the EUR and GBP with the market eyeing up today's ECB meeting, although Trichet is unlikely to advance current hawkish arguments in the money market any further (see below for full preview of ECB meeting). To this extent, the meeting could be an anti-climax given how much is priced into the market already and in view of the improving economic situation in the US (both ISMs have exceeded expectations) the USD should bounce back. Key EUR-USD levels to keep an eye on are yesterday's high at 1.3555 and the May 16 high at 1.3609, while 1.3510 and 1.3475 have initial significance on the downside. An eventual move back below 1.3400 is favoured short-term. Today's G8 summit is unlikely to reveal anything new for FX.

Cable may hold out for tomorrow's MPC meeting outcome, although it is highly unlikely that they will hike rates further at this juncture. Data developments since the last meeting have not been dramatic, with most releases at or below expectations apart from the strength in pricing intentions seen in manufacturing surveys. Key resistance area on cable is 1.9975- 2.0000, while below 1.9900-10 would be a negative signal.

The AUD was boosted further by a strong set of Q1 GDP numbers, which at 1.6% q/q came in well ahead of already elevated expectations of 1.2%. The AUD is now clear of the most recent high at 0.8392 and upside risk will remain in place as long as this level holds. The only threat is the USD strength against the majors that is likely in the second-half of this week, although there is a chance that AUD gains may prove to be durable. Labour market data is still to come tonight, although recent news may lead the RBA into believing that a further precautionary rate hike should be carried out sooner rather than later, even though CPI data has been fairly well behaved.

Today's developments also reinforce our belief that AUD strength will be more robust than that seen in the NZD. Sure enough the NZD has the higher yield, but economic risk in NZ is much higher, while the authorities are also more uncomfortable with currency strength. If, as seems likely, tonight's RBNZ rate announcement (see below for preview) fails to add to hawkish money market sentiment, the AUD could outperform the NZD further in the short-term. The tone of tonight's Australian labour market data will also be significant.

Day Ahead
Eurozone - the ECB meeting and press conference will be the main focal point. A 25bp rate hike is well discounted but more interesting will be what Trichet reveals in his press conference statement. One issue will be whether the reference to policy accommodation is changed in anyway. This latest rate hike will take the real ECB rate above 2% for the first time since August 2001 and for some council members this may be a sign that policy accommodation, or least a large part of it, has been removed. If this is the case the reference may be dropped or at least modified further. It was already watered down after the Dec hike when the ECB noted that policy was 'on the accommodative side' rather than 'accommodative'. Some time ago the ECB may have been concerned that such a change could have led to a belief that rates were close to peaking, although there seems little danger of this in the current bearish money market environment.

They are also likely to use other language to support the notion of further rate hikes (e.g. upside risks to inflation etc) and upward revisions to 2007 CPI and GDP forecasts will also serve such a purpose. However, it is not clear that Trichet will aggressively push this line of argument, given how hawkish the money market has already become. A further 25bp hike is already fully priced in by September and another is also pretty much in there for December (certainly by March). The 10-yr bund yield is up almost 60bp since the last hike in March and up 30bp since the May meeting. The ECB will probably not be too keen on such a rise advancing much further for the time being.

US - the Fed's Lacker will no doubt reiterate his usual hawkish take on the outlook for inflation, while Hoenig is likely to be more equivocal. Q1 unit labour costs will be viewed with inflation pressure in mind. The weaker than expected Q1 GDP outcome leaves some upside risk to the costs measure, although it should stay below 2%.

New Zealand - the RBNZ announce their latest policy decision and while they may turn slightly hawkish about future prospects, there may not be much here for NZD bulls. The RBNZ hiked rates at their last meeting on April 26 and at the time made no reference to the prospect of future hikes. They also protested the strength of the NZD. There could be some threat about the possibility of further tightening if household demand shows no signs of cooling, which had been their approach until April. However, while some of the data since the last meeting has been strong (notably retail sales), it has been for a period (March) that will not yet truly reflect the impact of the two rates hike conducted in March and April. They may want to see April and May data before taking a fresh view. A repeat of the April protest against NZD strength should also be seen.

Diary
Data/event BST Consensus*
Market holiday - Sweden, South Korea 
G8 G8 Summit (2 days) 
DE Manu orders (Apr) m/m 11.00 -1.0%
US Mortgage apps - purchases w/w 12.00 -2.5% last
US Challenger layoffs (May) 12.30 18.4% last
EU ECB meeting outcome 12.45, press conf 13.30 25bp
US Productivity (Q1, 2nd est) saar 13.30 1.0%
US Unit lab costs (Q1, 2nd est) saar 13.30 1.3%
CA Building permits (Apr) m/m 13.30 -5.0%
US Fed's Lacker on inflation outlook 14.50
CA PMI (May, nsa) 15.00 65.0
US Fed's Hoenig on economy & policy 19.45
NZ RBNZ rate announcement 22.00 unch
AU Employment (May) 02.30 11.3k
AU Unemployment rate (May) 02.30 4.4%
Latest data Actual Consensus*
US ABC consumer conf (w/e Jun 3) -15 -13 last
AU RBA rate announcement unch unch
AU GDP (Q1) q/q 1.6% 1.0%
* Consensus unless stated