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By Kathy Lien, Chief Strategist of DailyFX.com
Three things that could shake up the Dollar on Tuesday
No US economic data was released this morning explaining the listless action in the US dollar.
Traders are hesitant because they know that things could change dramatically with the three event risks tomorrow that could shake up the US dollar.
The first is the retail sales report for the month of June. Despite a deteriorating labour market and rising food and energy prices, consumer spending should remain positive.
Discounters like Wal-Mart, Costco and Target all reported stronger sales last month, indicating that even though consumers may be trading down, they are continuing to spend their tax rebates.
As long as consumer spending does not collapse, there may still be some hope for the US economy.
Both the ICSC and SpendingPulse reports also support stronger spending numbers. Excluding autos, SpendingPulse reported that sales rose by the largest amount in seven months.
A stronger retail sales report however may be eclipsed by Bernanke's semi-annual testimony on the economy and monetary policy.
The Fed Chairman should remain hawkish on inflation, but he will be forced to address the latest problems in the financial sector.
Expect Bernanke to come under significant pressure during the Question and Answer session for solutions to the latest financial market turmoil.
It doesn't help that going into the testimony, the Dow is trading near its two year lows.
Unfortunately no one is convinced that the Fed's offer for Fannie Mae and Freddie Mac to access the discount window or the Treasury's attempt to seek Congressional Approval for an investment and larger credit line will be enough.
The VIX, which is the CBOE's volatility index hit a three-month high today, indicating that the market is still nervous and skeptical about the effectiveness of the US government's latest announcements.
They rightfully believe that the Fed is running out of magic bullets. In order to avert another panic, the Fed needs to shock the markets, just as they did last year with aggressive easing.
The failure of mortgage lender IndyMac was also a big story today and with JPMorgan, Merrill Lynch and Citigroup reporting earnings at the end of the week, the health of the financial sector should continue to dominate the headlines.
Finally, keep an eye on producer prices since inflation is the primary reason why the US central bank has given up on cutting interest rates.
Euro retraces but still aiming for record highs
The euro gave back some of its recent gains as industrial production falls by the sharpest amount in 20 years.
This was widely expected given previous reports of slower manufacturing activity in France and Germany.
However despite clear signs of slower growth, ECB Member Bini Smaghi was crystal clear about the central bank's priorities in an article to the Financial Times on Friday.
He said that the slowdown in the productivity is not enough to take their focus off of inflation. If domestic inflation does not come down, there is only one option left, which is monetary policy and all should be aware that the central bank must ultimately act if this is what is needed to maintain price stability.
For this reason, the EUR/USD could continue to rise towards its record highs.
Kathy Lien, Chief Strategist, Daily FX
