The EUR/USD1.2150 area once again lent support to the EUR last night.  Denials from the Chinese government that it is considering diversifying away from EUR assets pushed EUR/USD towards 1.2350, but the lack of follow through reflects the continued anxiety about the debt issues in the Eurozone.  Sterling is performing well this morning following tough words from PM Cameron on the budget deficit with EUR/GBP pushing closer to the key 0.8400 support area.   AUD/USD's recovery is has taken it above 0.84000; though headline news regarding the watering down of the Australian mining tax has been partly undermined by the detail.  

US fundamentals have been firmly in the back seat this year but this afternoon's revision to Q1 GDP data should be a reminder that the pace of economic recovery has been gathering steam.  US GDP is expected to be revised higher to 3.4% annualised from a preliminary estimate of 3.2%.  Crucially many forecasters are expected to see signs that the recovery in the US is becoming less dependent on government spending and more self sustaining.   That said better data today will not fundamentally alter the market's view on US interest rates.  The US unemployment rate at 9.9% is too high and the inflation rate too low for the Fed to be in any hurry to raise rates, but stronger growth data should undermine fears of contagion from the Eurozone debt crisis and will likely allow for a relaxation in some of the market's indicators of risk and bring further bargain hunters into stock markets and into currencies such as the AUD and the CAD vs the USD.  

Also likely to sooth the market's hackles is yesterday's report from the Bundesbank that the German economy is growing strongly in the second quarter.  The benefits of the weaker EUR to Germany will be more significant than in most other Eurozone countries due to the fact that it exports more outside the Eurozone borders (the US is its second largest export partner).  Ironically, the EUR has weakened as a result of debt problems in S.Europe which the German electorate are reluctant to fund.   The German electorate must make up their minds whether EMU is of net benefit to them.   If they decide it is not and that more financial support will not be forthcoming if necessary then Europe's bad debt will have to be uncovered and the EUR's future will be further undermined.  With growth prospects in the Eurozone likely to be around 1% this year it will be many months, potentially years before many Eurozone countries can shake off their high deficit/GDP ratios and given huge uncertainties about the potential for bad debt in Europe, EUR/USD can be expected to maintain its downside bias towards 1.18 in a 1 to 3 mth view.  

Sterling is showing signs of strength vs the EUR.  Following the break below EUR/GBP0.8485 yesterday the technical outlook for sterling is becoming more constructive.  That said the pound remains above last year's low of 0.84; a break below may trigger a more sustainable recovery for the pound vs the EUR.   The June 22 budget will be crucial in outlining the government's commitment to fiscal repair.  It will also be key in illustrating the coherence of the new coalition government.  The initial signs are good; PM Cameron stated this morning that the budget deficit is an existential threat to the UK.  Sterling will be rewarded by further indications that the deficit will be tackled.  

The threshold profit for the Australian mining tax has been raised from 11-12% from 6%.  However, the Australian government is reportedly looking to repeal an existing subsidy to the mining sector which had sapped the impact of this news.  That said the better tone with respect to risk has pushed AUD/USD above 0.8400 this morning.  AUD/EUR is pushing back towards 0.6850.

In addition to the US GDP revision, initial claims data are due. Jane FoleyResearch DirectorFOREX.comjfoley@forex.com+44 207 398 5024