Sterling has fallen further vs the USD this morning; the pound suffering heavily vs the EUR too.  The AUD has also been a poor performer on the back of a dovish tone in last night's RBA minutes.  EUR/USD has reversed its Asian falls, returning to last night's closing levels.  

There has been little fundamental change in the news stemming from the Eurozone this week.  Greece will today receive EUR20 bln in its first tranche of loans from the EU, but this is no surprise; given Greece's May 19th refinancing deadline, no funds today would have meant default tomorrow.  EUR/USD has pushed higher in London hours, printing an intraday high of 1.2431.  As yet this week's consolidation has done nothing to alter the bearish overall trend.  A healthy trend can be expected to be laced with periods when profits are taken and extremes in sentiment are shaken out.  Given continued worries about the fiscal position of the Eurozone, gains in the EUR will likely be used as opportunities to create fresh shorts.  While it is broadly recognised that the Eurozone Stability Pact must be strengthened to reinforce the fiscal coherence of EMU going forward the ability of EU ministers to do this may be limited.  Clearly the Germany electorate is in no mood to support what is seen by many as a system of fiscal transfers.  This drives home the point that EU is made up of a cluster of sovereign states most of whom will want to their autonomy over fiscal policy.  This factor may mean that the EU will eventually have to recognise that the Greece will have to be allowed to default on its debt and potentially be allowed to exit EMU for the greater good of the system.  The sharp fall in this morning's release of Germany's ZEW survey (to 45.8 in May from 53.0 in April) is a reminder that the uncertainties surrounding the fiscal crisis is having a detrimental impact on investor confidence.  This supports the view that EU ministers should act quickly to restructure Greek debt.  That said, so long as sell-off in the EUR is relatively ordered EU officials will delay taking politically painful decisions.  

Over the past week sterling has fallen 1.75 times further vs the USD then the EUR.  The weakness of the pound reflects the broadening awareness in the market about the depth of the fiscal shortfall facing the new UK government.  While it is unsurprising that a new government blame the old for poor fiscal decisions, indications that new ministers may be finding skeletons in the cupboard combined with disparaging remarks about the integrity of statistical data has caused the market to worry that the UK budget deficit could be even greater than the GBP163 bln whopper currently posted.  Sterling could remains vulnerable in the approach to the June 22 budget.  That said, strong indications that this government will take tough decision to deal with the task in hand should reflect well on the pound.  Medium-term there is scope for EUR/GBP to push below the 2009 low of 0.8400 assuming confidence increases that fiscal repair will commence in the UK.  Today's UK inflation data rose to a far higher than expected 3.7% y/y.  This will prompt yet another letter of explanation from the BoE to the government.  However, Governor King made clear last week that he continues to see pitfalls ahead of the economy.  Given the Bank's forecast that inflation will fall below its target medium-term, today's inflation data do not significantly alter the view that BoE rates will stay low for some time yet.  

A dovish set of minutes from the May RBA meeting have driven home the risk that rates could remain on hold next month.  The minutes note that after the May rate hike rates facing borrowers would likely be at their average levels over the last decade.  The AUD fell on the news in Asian hours.  However, profit-taking in short EUR position and a push higher in stocks indices has allowed the 'risky' AUD to win back some of its overnight losses in a choppy London session.  Medium-term, the AUD could struggle against a better bid USD.  

US PPI, housing starts, building permits and ABC confidence are due today. Jane FoleyResearch DirectorFOREX.comjfoley@forex.com+44 207 398 5024