US Dollar - Bernanke and Retail Sales to Drive Activity This Week (page 1 of 2)

DailyFX Fundamentals 02-12-07

By Kathy Lien, Chief Strategist of DailyFX.com

US Dollar - With the G7 meeting behind us, traders have taken the US dollar higher once again. With no major US data on the calendar, today's move is nothing more than a relief rally. Any official criticism from the G7 finance ministers about the Japanese Yen would have been negative for the US dollar since the high yielding currency would have fallen victim to carry trade liquidation. Instead, the combination of a lack of an official mention and falling oil prices has helped to push the dollar higher once again. The US fiscal condition continues to improve as the US posted a $38.2 billion budget surplus in the month of January. With a busy economic calendar ahead of us, the EUR/USD runs a strong chance of breaking out of its 1.2860 to 1.3060 range. The marquee events this week are on Wednesday when we get retail sales for the month of January and Bernanke's comments on the economy and monetary policy. The central bank head has been tight lipped about his views on growth and inflation since the last FOMC statement. Although the Federal Reserve will most likely acknowledge the stronger growth that we have seen recently, they may opt to explain their cautiously hawkish statement from the last meeting. The concerns center on the housing market as they have previously indicated that it may be too early to tell whether the sector has stabilized. The odds are for a more dollar positive statement but any further hesitancy could prevent the dollar from rallying. In the meantime we have the trade balance due for release tomorrow. The deficit is expected to increase due to a higher oil import bill.

Euro - The Euro is nearing the bottom of its month long trading range against the US dollar. There was no economic data released this morning and the comments from Eurozone officials continue to be optimistic. Over the weekend ECB member Mario Draghi said there were no signs of an economic slowdown in the Eurozone. These comments come after the hawkish comments that we heard from ECB President Trichet last week. Even though this week is dominated by US data, traders should not lose sight of the fact that the ECB has signaled to the market their intention of raising interest rates again in March. Tomorrow we have fourth quarter GDP data from the four major countries within the Eurozone as well as the German ZEW survey. The region as a whole performed well in the fourth quarter and we expect the GDP data to reflect that. The ZEW survey however could surprise to the downside as analysts consider the delayed impact of Germany's Value Added tax increase. The market could put more weight on the ZEW data since it is forward looking while the GDP data is backward looking. The combination of a strong ZEW and GDP report however could exacerbate Euro strength as range traders look for anything to key off of.

British Pound - The British pound is weaker against the US dollar today as traders respond to the surprising 2 percent drop on the inputs for producer prices in the month of January. Although output prices increased, the drop in input prices raises concerns that tomorrow's consumer price report could also surprise to the downside. The Bank of England likes to keep the market guessing and traders are still trying to figure out whether we will see another rate hike in March after the Bank's surprise hike in January. A decline in both consumer and producer prices would signal a more neutral stance from BoE Governor King when he delivers the Quarterly Inflation Report on Wednesday.