Euro and Yen Prepare For Next Week

Despite the fact that US Retail Sales posted a better than expected gain of 0.6% vs. 0.4% consensus the pair has held the 1.2100 figure since yesterday. As we noted, "A positive number may help the dollar bulls push the pair below the 1.2100 barrier once again, but only a very strong result is likely to keep the EUR/USD pinned below those levels for the rest of the week.

Focus will soon turn to Monday's TICs report which could show the third consecutive month of foreign capital inflows failing to offset the Trade deficit gap. Worries about the structural problems of the US Balance sheet may weigh on the pair as FX dealing slows to a crawl heading into the holiday."

Next week is indeed shaping up as a make or break time in the currency market with a slew of US economic data on deck, including the critical TIC report as well as the important housing and inflation releases, likely to guide the direction of the pair. US data takes on even more importance in light of the fact that European calendar is practically barren and the euro will therefore trade reactively off US economic news.

In Asia the yen continues to underperform as comments from various Japanese authorities suggest that the Zero Interest Rate Policy may remain in place longer than the market anticipates. Tonight's release of the BOJ minutes revealed that the board believes if inflationary pressures are restrained as the economy follows a balanced and sustainable growth path, an accommodative monetary environment will probably be maintained for some time.

Yesterday's muted CGPI numbers left little immediate need for BOJ to turn hawkish, making yen vulnerable to further carry trade flows with the 119.00 level now marking the line in the sand between the bulls and the bears. A break higher could open the path to a challenge of last year's highs at 121.38, especially if the meeting between Chinese Prime Minister Hu Jintao and President Bush next week produces little meaningful change in China's FX policy.