Morning Forex Update :

This week trader will be specifically intent on the Central Bank action in the UK, Australia and Euro-Zone which will drive market volatility. Currently market sentiment is overweighting interest rate differentials over other macro factors. Countries looking to hike rates will gain over those in a neutral stance.

ECB – We and the market expect a .25% hike to 3.00% on Thursday, however the risk will come with subsequent comments. There are significant indications that Trichet will take a dovish tone, implying no commitment to further rate hikes. If this occurs the Euro will be sold off.

BoE – In the UK the situation surrounding the MPC is a touch less clear. Only a few analysts expect rate hike and the MPC have signaled no urgency to raise rates. However, recent changes in the labor conditions and housing sectors have added pressures to UK economy, which we believe will have the BoE looking to raise rates. Traders should see a decent broad based GBP appreciation.

RBA - Todays higher Private Sector Credit added an interesting twist to Australia monetary policy outlook. Wednesday Cash Rate is all but in the books to move to 6.00% from 5.75%. However, with a still accelerating economy, and past rate hike unable to slow growth the RBA might look to raise rates above 6.00%. The market will be watching of any additional hawish comments from the RBA with will send the AUD higher.