Overnight trading was quiet with most major currency pairs confined in a tight range. The biggest action was in the Yen crosses and USD/JPY in particular. Political stress is keeping the Yen under pressure with the widely unpopular consumption tax pushed forward by Prime Minister Noda prompting the submission of resignation letters by 36 lawmakers. While some newspapers in Japan argue that the removal of his DPJ archrival Ichiro Ozawa has brought relief to Noda who can now push forward with an agreement with the 2 opposition parties, political uncertainty is never good for a country’s currency which explains part of the reason why the Yen has performed so poorly on this quiet day. North American traders are in full vacation mode with factory orders being the only piece of U.S. data on the calendar. A small improvement in factory orders is expected after a sharp decline in April but any improvements will be ignored following yesterday’s steep decline in the ISM manufacturing index. With most U.S. traders already on vacation mode, it should be a quiet day marked by low volume and consolidation.

The euro and the British pound are struggling to hold onto their gains despite lower Spanish and Italian bond yields. The ECB and BoE have monetary policy announcements this week and economists are looking for both central banks to ease. With Eurozone producer prices falling 0.5 percent in May, the decline in inflationary pressures means these central banks can increase monetary stimulus without stoking inflationary pressures. U.K. construction sector activity in the month of June contracted for the first time in 1.5 years and by the largest amount in more than 2.5 years. Sluggish growth, recessionary conditions and weak demand has prevented any meaningful improvement in the housing market. In the near term, the Bank of England has a stronger reason to ease than the European Central Bank but over the long term, the Eurozone has more entrenched growth problems. As expected, the Reserve Bank of Australia left interest rates unchanged at 3.5 percent. While the RBA continued to express concern about the international outlook, they upgraded their onshore assessment, saying that domestic growth was somewhat stronger than earlier indicated. While this was not enough to help the AUD/USD hold onto its gains, it did not threaten the rally.

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