httpvh://www.youtube.com/watch?v=BDMoWfJwzbs

The US dollar continued to fight back from its recent weakness on Friday pushing GBPUSD into the 1.54s and EURUSD back towards the 1.28 level. It failed to break important technical levels however and, unless it does, the risk of sharp moves back higher have to remain a possibility.

The risk aversion argument is something we are having to take more notice as it was a comment from ECB member Weber that allowed the US dollar to strengthen as investors looked for haven safety. Weber commented that the European policy of lending unlimited funds to banks should continue into 2011. The desire to do so would suggest that everything is not as it seems and the risk profile in Europe isn’t diminishing as quickly as some people had thought. This heightened fear has been highlighted in the increase in CDS prices and bond yields on peripheral European debt.

The main story over the weekend was the hung parliament election in Australia. This is the first hung parliament in Australia in 70 years and AUD is taking a hit this morning as GBP did in the wake of our election. While the result is a short-term negative for Australian assets it is unlikely to last and we would expects falls to be clawed back within a month or so.

There was a lack of GBP data over the weekend and that continues today with all data due from Europe. Pound watchers will be focusing on UK GDP on Friday; this is the second reading of Q2 GDP and is expected at 1.1%.