US Dollar: Comments from Fed Chairman Bernanke Could Set a Near Term Bottom (page 2 of 2)

The annual pace of retail price growth increased from 4.3 to 4.4 per cent, indicating that inflationary pressures are still a big problem in the UK.

This means not only could we be looking at six per cent interest rates over the next few months, but more immediately, the price action in the British pound suggests that traders are looking for the minutes from the Bank of England meeting earlier this month to reveal a unanimous - if not close to unanimous - decision to raise interest rates.

Anything short of seven out of nine votes in favour of a rate hike would be construed as dovish. The bigger risk is certainly to the downside, given the extent of the recent rally.

In addition to the minutes, we are also expecting the UK's labour market report for June. If wage growth slows as expected, 2.05 could be the peak in the GBP/USD.

Commodity Currencies Retrace After Solid Gains

After yesterday's blockbuster gains, the Canadian and New Zealand dollar consolidated amidst the lack of any meaningful economic data. Canada has consumer prices and leading indicators due for release tomorrow morning. The strong Canadian dollar is expected to drive inflation down, but the overall strength of the economy could limit any major slide.

The Australian dollar pushed higher despite the smaller growth in exports in June. The country is also releasing leading indicators tonight, but the data is never market moving because it dates back to May. Overall, the commodity currencies are continuing on their trends, but the moves are becoming exhausted. The sustainability of the rallies will be dependent upon how dollar bullish Fed Chairman Ben Bernanke will be tomorrow.

Euro Hovers Near Its All-Time Highs

Trading the EUR/USD is like trading EUR/CHF (Swiss franc) these days. The currency has remained stuck within an 80 point range for the past five trading days.

Such a tight range usually leads to an extremely volatile breakout so instead of becoming complacent, traders should be on guard since tomorrow's event risks could easily lead to a major move. The deterioration in the German ZEW business confidence indicator barely put a dent into the Euro.

In the past, the market would watch analyst sentiment carefully. However business sentiment has recently become far more important. Meanwhile over in Switzerland, retail sales were much stronger than expected in May. This helped the franc rally against both the euro and US dollar. Economic growth has been strong in Switzerland, paving the way for another rate hike this year.