Dollar Bulls are Positioning for Hawkish FOMC Statement (page 2 of 2)

British Pound - Despite the sharp drop in the CBI manufacturing survey from -5 to -20, hawkish comments from the Bank of England's monetary policy committee has helped the British pound hold above the 1.8700 level against the US dollar.

The manufacturing sector is still fragile, but that has not stopped the central bank from considering raising interest rates. Charles Bean said today that it is best to "err on the side of caution against inflation." Like his peers around the world, he believes that core (or non-energy) inflation is still persistently high and that warrants caution by the central bank.

Bean is not the first that we have heard such comments from. The minutes from the October meeting indicated that Tim Besley and Andrew Sentance voted in favor of a rate hike earlier this month. Even Mervyn King noted two weeks ago that the declines in September inflation were most likely temporary. Therefore another rate hike in November may not be completely off the table.

Japanese Yen - The Japanese Yen continues to remain weak as it awaits direction from the US rate setting committee. Oil prices are marginally higher which may have contributed to the slide against pairs like the Euro, Aussie, Canadian dollar and British pound, but for the most part, central banks continue to cap gains in the Yen crosses. The longer the Yen remains weak, the more beneficial it will be for the Japanese economy. Tonight's trade balance report should already reflect an improvement in exports. Tomorrow the yen should take a back seat to the action in the rest of the world.

Commodity Currencies (CAD, AUD, NZD) - The Canadian dollar has rallied strongly against the US dollar thanks to a new round of acquisition news and some month end repatriation by Canadian oil and gas producers.

Although no data is set for release tomorrow, Bank of Canada's Dodge and Jenkins will be talking about the economy sometime tomorrow. In the world of the commodity currencies, Australia and New Zealand should be the day's bigger focus.

Both countries will be reporting consumer price data with decelerations in price growth expected in both though the risk is to the upside given the strong PPI report from Australia on Monday. New Zealand will also be announcing an interest rate decision at 4pm EST on Wednesday. The decision will be close. Even though the Bloomberg consensus calls for no changes, analysts are split 50-50 on a chance for a quarter point hike. Tonight's CPI data will be the early clue on how the RBNZ will swing.