The euro dollar is at 1.4519, the pound to euro rate is at 1.1310 and the euro to Australian dollar rate is at 1.3248. The US dollar exchange rate, USD, continues to trade on back footing as political infighting over raising the US debt ceiling erodes the market’s confidence in the US and the USD. EURUSD pushed up to 1.4536, but with regional equities mixed was unable to trade higher. USDCHF continues to pressure the 0.8000 handle taking quick trips below the psychological level. AUD was the big winner on the currency markets taking out stops above 1.10 running up to 1.1063. The catalyst was the CPI upside surprised at 0.9% vs. 0.7% q/q, 3.6% vs. 3.4% y/y exp. The rates market is still pricing in an 8bp cut (down from yesterday 22bp exp) by the year’s end. Obviously, the sudden shift in growth, inflation indicators and optimistic comment from Governor Steven suggests that a rate hike or at least a shift towards more hawkish statement is an increasing probability. US debt The US debt deadlock continued as Speaker John Boehner’s two-step strategy to increase the U.S. debt ceiling was blocked by Congressional Budget Office who stated that the proposal would cut the deficit by less than it actually claims. A morning currency note from AC Markets says: "The failure of Republicans to stick to proper accounting practices would have surely given President Obama the authority to veto the plan. As we have stated, we suspect that the negotiations and horse trading will go till the 11th hr before a “grand bargain” is struck. "However, the damage to the USD’s reputation and reaction by credit rating agencies are more of a certainty. There is a significant risk that the rating agencies do not find them credible and would lean towards a potential downgrade. We continue to anticipate US weakness until the August 2nd deadline."

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