The pound reaches a 3 year high against the Australian dollar

The pound opened yesterday morning at its best rate since August 2010 against the Australian dollar ahead of key central bank policy decisions over the next few days.

Rumours in the market that the Reserve Bank of Australia will ease policy further with a second interest rate cut this year together with a continuous stream of poor economic data from China put the Aussie to the sword. However, strong volatility is expected over the next day’s across all major currencies as tonight sees the latest US Federal Reserve policy decision followed by the latest from both the Bank of England and the European Central bank tomorrow.

The majority of analysts believe that we will see an ambiguous signal from the Fed about the exact timing of any tapering of its $85 billion a month stimulus package.

Ahead of the Fed announcement, the International Monetary Fund (IMF) reported yesterday that the underlying condition of the US economy seems to be improving. However, the IMF added that the recovery from recession has so far been "tepid".

Data would seem to support the idea that the US is a lot further on the road back to economic health than many countries in Europe.

In the euro zone, the euro strengthened on the back of better than expected news from Spain which reported a fall in its unemployment rate for the first time in two years with a rate of 26.3% registered in the second quarter of the year, down from a record 27.2% in the first quarter of 2013.

This after the Spanish central bank forecast that the Spanish economy will return to growth before the end of 2013. It estimated the economy shrank again in the second quarter of 2013 but only by 0.1%.

The pound fell yesterday to a 4 month low against the euro on the expectation that tomorrow’s announcement from the Bank of England will see a further loosening of policy, possibly with the implementation of a policy of ‘forward guidance’ used by new Governor Mark Carney in his days running the Bank of Canada.