Interest rate speculation will once again be a primary driver of the Aussie dollar this week. Wednesday’s Consumer Price Index is likely to sway opinion on what the RBA will do when they reconvene in August. Consumer prices are expected to have risen 1 percent in Q2 to represent annual growth of 3.4 percent from a previous 2.9 percent. With the RBA's target for inflation between 2-3 percent, any significant move north will likely increase the chances of a hike in August. However, we know the RBA have attributed headline inflation being above target due to recent tobacco tax hikes amongst other factors - the RBA however expects core inflation to moderate in year-end terms. Core inflation will be the telling point given the RBA expects if we take away the volatile items the headline figure shows, we're going to see inflation within target, albeit towards the upper echelons of target. The RBA are likely to react given inflationary pressures in underlying CPI come in stronger than expected.

At the time of writing the Aussie is buying 89.65 US cents and the fortunes of the Aussie dollar will be directed by both inflation data on Wednesday and of course the close correlation of the local unit and US equities/global sentiment will remain a primary driver. A solid week in sentiment from the US is likely to see the Aussie head on north bound trajectory 90 US cent levels.

European Stress test results

Out of 91 banks under the microscope, 7 failed the minimum funds requirement of at least 6 percent of tier 1 capital. Despite a reasonably mute response from currencies, the common consensus amongst analysts appears to be ‘they've look under the hood but haven't really conducted the full service’. Price activity from European equities and the Euro didn’t exactly suggest the markets ecstatic about the results rather a pretty dull reaction. Time will tell if investor derive long term confidence in the result, or simply a stabilizing factor with an expiry date. For now, we expect the focus to be on the banks that made it through by a small margin namely the Greek, Spanish and Italian banks which look dangerously close to the hitting the 6 per cent tier 1 capital threshold.

Despite large question marks around the credibility of the stress test the Euro remains well bid around US$1.2920. We suspect the true reaction to the stress test will be as European markets open shop for the week, which may find the Euro in a vulnerable position. A lull in confidence surrounding the validity of the test may see the Euro retrace its recent rally.