The pound hit 26 year highs in overnight trade but stopped just short of the 2.0200 level as speculation continued to mount that BoE will raise rates to 5.75% at the upcoming MPC meeting on Thursday. The unit was also helped by the stronger than forecast Construction PMI figures which printed at 60.1 vs. 57.7 suggesting that demand in the sector remains robust in face of already higher rates and further that the UK economy should be able to withstand future hikes by the BoE without the danger of a substantial slowdown in growth.

The FX market continues to allocate capital to higher yielding currencies with the New Zealand dollar soaring to .7850 in its seemingly unstoppable run towards the .8000 figure. However, the Aussie was the one high yielder hurt in tonight’s trade as Australian Retail Sales printed significantly short of expectations at -.0.1% vs. 0.7% projected. This was the first back to back monthly contraction this decade and almost assuredly puts an end to any speculation about a near term rate hike from the RBA.

Tomorrow, the Australian Central Bank is expected to keep rates steady at 6.25%, but the more critical question on the minds of most traders is whether tonight’s soft Retail Sales data may preclude the bank from tightening in August or September. If that indeed will be the case the Aussie is very likely to under perform going forward as carry trade flow will be diverted to other high yielders such the kiwi or cable.

Meanwhile, the euro also performed well on the crosses rallying against the franc after Swiss CPI printed cooler than expected at 0.1% vs. 0.2% and hitting all time highs once again against the yen. The unit is within striking distance of record highs against the greenback and may well achieve them before the end of the week especially if the ECB press conference on Thursday proves to be as hawkish as the market anticipates. At this point analysts forecast two rate hikes from the ECB before the year end while expecting the Fed to remain stationary and this underlying dynamic has been the primary driver of the latest euro rally.

Boris Schlossberg is a Senior Currency Strategist at FXCM.