Bank of Japan Rate Decision is the Marquee Event Next Week for the FX Market (page 1 of 2)

DailyFX.com Fundamentals 02-16-07

By Kathy Lien, Chief Strategist

US Dollar - The market is getting tired of selling US dollars and has instead opted to take profit on dollar shorts ahead of the three day weekend in the US. Economic data continued to disappoint, but the disappointments were still not significant enough to stop the Federal Reserve from raising interest rates. This morning, producer prices fell 0.6 percent in the month of January, housing starts dropped 14.3 percent while consumer confidence slipped to 93.3. The disappointments proved to be anti-climatic since these are second tier reports. Even though PPI is fairly important, the drop was in line with expectations and prices excluding food and energy increased by 0.2 percent. As if to assure the market that the Federal Reserve is not worried about the drop in PPI, Chicago Fed President Moskow came on the wires after the release and said that the Fed still needs to clamp down on inflation and will continue to look to raise interest rates. He was optimistic about growth, downplayed the weakness in the housing market and warned that inflation risks remain to the upside. Unfortunately the week ahead will yield little clarity. The only important of piece of economic data on the calendar is consumer prices. Weakness is expected and will not be a surprise. Inflation is dropping around the world, but all of the central banks believe that this drop should only be temporary given the resurgence in energy prices this month. Furthermore, housing is the Fed's number one focus and we will not get more housing related data until the following week. This means that the dollar could consolidate in the week ahead, especially against the Euro given its lack of meaningful data other than the German IFO report.

Euro - After consolidating within a 200 point trading range for over a month, the EUR/USD has finally broken out this past week. An upside breakout was triggered by a barrage of disappointing US economic data in the face of a consistently hawkish Central Bank in Europe. Eurozone economic data continues to outperform with the trade surplus increasing from 2.0 billion to 2.5 billion in the month of December. French non-farm payrolls increased by 0.2 percent in the fourth quarter, which was right in line with expectations. The hawkishness continues to be reflected in the comments from European officials. ECB Wellink said that the economy is running at full steam while Gonzalez-Paramo said that the ECB cannot be calm on inflation risks. In the week ahead, there are number of second tier Eurozone data such as French GDP, consumer prices, Eurozone current account and industrial orders. The most important release is the German IFO report on Friday. Business sentiment is expected to hold steady but we believe that the risks are skewed to the downside since January's optimism may have stemmed from the aggressive consumer spending that we saw in the month of December. Looking ahead, the risks that the Value Added tax may begin to hurt the economy are increasing and business confidence could reflect that outlook. Meanwhile Switzerland reported a very strong 9.2 percent increase in retail sales today, but the market shrugged the number off ahead of the US data. In the week ahead, the only piece of Swiss data due for release is the trade balance but SNB President Roth is also scheduled to speak.

British Pound - It has been a tough week for the British pound as weak economic data caused the currency to under perform against both the Euro and US dollar.