US Dollar Will Struggle to Rally This Week (page 2 of 2)

The Bank of England also noted that inflationary pressures has ebbed and have become unusually stable. This follows last week's report from the National Statistics Office that revealed a 0.8 percent drop in prices in the month of January. However the weakness in the British pound did not last long as the market tries to figure whether the Bank of England will still raise interest rates in March. Given the recent weakness in UK economic data, the odds for a rate hike are slim. Yet today's recovery in the British pound suggests that traders do not want to be short going into the release of the minutes from the Bank of England monetary policy meeting earlier this month. If the decision to leave rates unchanged was unanimous, then the odds for a rate hike in March will be very low. If at least 2 members voted in favor of a rate hike, then market expectations will quickly adjust to reflect the possibility of 5.50 percent rates next month.

Japanese Yen - The Bank of Japan's interest rate decision scheduled for Wednesday morning Tokyo time is this week's most important economic release. The continual rise in Japanese stocks has helped to boost rate hike expectations. On Friday, the odds were essentially 50-50 for a rate hike but now they are closer to 65-35. Former Deputy Governor Fujiwara said overnight that this is the right time for the BoJ to raise interest rates. However aside from strong fourth quarter GDP numbers and the potential for a behind the scenes agreement between the Europeans and the Japanese at this month's G7 meeting, there is no strong reason for the BoJ to deliver an early rate hike. Growth is improving, but there aren't any signs of a significant pickup in inflation and consumer consumption. Either way expect the Japanese Yen to be a big market mover next week.

Commodity Currencies (CAD, AUD, NZD) - Canadian data took center stage today with both international securities transactions and wholesale data scheduled for the President's Day holiday. Rising by 2.7 percent, wholesale sales saw the biggest increase in more than two years and tripled consensus estimates. However, the figure was supported by higher sales in automobiles, usually considered a volatile sub component. Nonetheless, the report does put the Canadian economy in a positive light as it follows manufacturing and home sale up ticks in the past month. The notion supports the possibility that rate hike considerations may be on the longer term horizon, boosting Canadian bullishness in the near term. The currency remained weaker, however, as the international securities transactions data fell short of expectations. Foreign sources sold C$3.26 billion in Canadian securities in December after increasing their purchases by C$11.2 billion the prior month. The Australian dollar remained virtually unchanged while the New Zealand dollar staged a strong rally that is most likely linked to yen selling given the sharp move higher in NZD/JPY today.