Euro Climbs on Trichet Expectations

The EUR gained in anticipation that ECB President Trichet will sound a  hawkish tone on inflation following tomorrow's ECB interest rate decision. Market participants seem to be not worried about the potential for Portugal to need a rescue deal as markets may have priced in some kind of resolution at this point. Seeing the EU leaders deal with Greece and Ireland, the bet is that they will get through any Portugal crisis as well. With the sovereign debt crisis not taking a major role this week, we continue to focus on interest rate differentials, which is helping support the EUR.

A stronger than expected climb in producer prices - a rise of 1.5% compared to 1.1% expected for January - helped to support the case that the ECB will up its rhetoric on inflation.

On the topic of Portugal we saw the country buy back 90 mln in bonds out of 4.342 bln maturing in April as well as 20 mln in bonds out of 4.934 bln maturing in June. The move is designed to reassure investors the country has no problems redeeming its debt.

See Today's EUR/USD Technical Update: EUR/USD Forms Positive Reversal; Swing Projection Targets 1.3890

Macro Data Helping to Boost GBP

The GBP rose as its construction PMI posted its best reading in 8 months, which will be a boost for GDP, and is the type of macro economic data needed for the BoE to feel comfortable raising interest rates in order to combat inflation. The Purchasing Managers' Index for the construction sector jumped to 56.5 in February from 53.7 in January. On Tuesday, we saw the manufacturing PMI reading, at 61.5,  post a record pace of expansion. The GBP has been gaining on the USD and others due to changes in interest rate differentials.

See Today's Technical Update on GBP: GBP/USD Retains Bullish Momentum after Throwback

NZD Sold as Prime Minister Suggests Rate Cut

Finally, the NZD had a poor session as the Prime Minister John Key said that he would welcome an interest rate cut. The country is dealing with a recent earthquake that hit the town of Christchurch, and the impact on the economy is still being estimated. Combined with a quake about 1-month before, the estimated damage iz NZ$20 billion ($14.8 billion)

The NZD slipped to an 18-year low against the AUD, and was at its lowest this year against the USD.

See Today's Technical Update on NZD: NZD/USD to Test the 0.7342 Pivot; Some Bearish Scenarios

See Today's Technical Update on CAD: USD/CAD's Support Levels Below 0.97

Market's Reaction to Libya Hurts USD

The market's reaction to the continuing unrest in Libya remained a bit confusing. In other markets, the risk aversion was clear in that we had gold edging close to record highs, while oil prices - US light crude - up above $100 again. In currency markets, we saw last week how risk aversion did not help the USD, as a jump in oil prices could be a headwind for the US economy. Higher oil means higher gas prices, which cuts into discretionary incomes.

The CHF has become the safe haven of choice during this period, though the JPY has also been supported. However, currencies usually considered more risky like the Canadian Dollar, managed to be supported as well, thanks to their links to higher commodity prices. In other words, seems like the USD is the odd man out during this turmoil and is taking the brunt of the effect of higher oil. The AUD and NZD were pressured on their own fundamental events.

Those higher yielding riskier currencies will not be doing as well if the threat of higher oil was to stay as that would crimp overall global growth prospects - which would hit demand for the commodities that places like Australia, New Zealand and Canada depend on. The view now is that the surge in oil will prove temporary.