What Could Drive the Dollar Higher Next Week?
Weaker economic data continues to drive the US dollar lower. Even though import prices hit a one year high last month, the Treasury International Capital flow report, Empire State manufacturing survey and consumer confidence fell short of expectations. Problems in the housing and labor markets have forced consumer sentiment to 16 year lows while manufacturing activity in the NY region dropped to a 4 year low. These numbers line up with the comments made by Federal Reserve Chairman Ben Bernanke yesterday who warned that consumer spending could remain under pressure. In January, retail sales increased 0.3 percent, which was much stronger than the market expected, but given the turn in consumer sentiment and Bernanke’s bearish comments, consumer spending could drop once again. Growth numbers clearly tells us that the US economy is in trouble and the Federal Reserve needs to continue to lower interest rates. However as we saw in today’s import price report, inflation remains a problem which is why the dollar could move higher in the coming week. It will be a shortened trading week with US markets closed on Monday for President’s Day. The only pieces of potentially market-moving US economic data on the calendar are consumer prices, housing starts, building permits and the Philadelphia Fed survey. The Federal Reserve will also be releasing the minutes from their January monetary policy meeting. Oil and food prices are very high which is why import prices have surged. We do not believe that consumer prices will escape the same upside pressure especially since the US dollar is weak. Therefore, a stronger than expected CPI number could drive the dollar higher especially since it will be the first major release from US. Overall, however, none of next week’s numbers should help to alleviate concerns for a recession and if anything, the FOMC minutes will echo the same dollar bearish tone as Bernanke.

Euro Rallies But Eurozone Growth Could Continue to Slow
The Euro has had a strong week with the currency rallying over 200 pips against the US dollar. The primary driver of the Euro’s strength has been the European Central Bank’s hawkish monetary policy and continued weakness in the US economy. However, Eurozone growth is slowing which will make it difficult for the ECB to remain staunchly hawkish. Last week, we already saw them “give up a little” by admitting that there are downside risks to growth. The strains that a slowing US economy and a strong currency is having on the Eurozone economy are revealing themselves as the trade balance for the Eurozone goes from a surplus to a deficit for the first time in 16 months. Exports declined in both
Germany and France while imports from China continued to rise. Next week, we are expecting German producer prices, the Eurozone current account balance, and the advance release of Eurozone PMI. None of these reports should be extremely market moving. The Swiss Franc on the other hand could be in play with retail sales, the trade balance, and producer prices due for release.

Bank of Japan Leaves Interest Rates Unchanged
As the market expected, the members of the Bank of Japan monetary policy committee voted unanimously to leave interest rates unchanged at 0.50 percent. Like many of the other central banks around the world, they have buckled down and acknowledged that their economy could be negatively impacted by slower global growth. According to Bank of Japan
Governor Fukui, the signs of a US slowdown are stronger. In the BoJ monthly report, the central bank expects exports to rise at a slowing pace and production in the short term to be flat. Next week, we only have a few pieces of Japanese economic data due for release: leading indicators and the merchandise trade balance. The Bank of Japan will also be releasing the minutes from their January monetary policy meeting. Since they left interest rates unchanged back then as well, the report should have no impact on the Japanese yen.

British Pound Rally Comes to an End
After moving higher for five days straight, the British pound’s rally has finally come to an end. There was no UK economic data released today which means that the move was driven almost entirely by dollar weakness. We continue to expect the British pound to remain firm next week with the minutes from the latest Bank of England monetary policy meeting due for release along with retail sales. The Quarterly Inflation Report released earlier this week was hawkish so we suspect that the vote to cut rates at the last meeting was a close one. As for consumer spending, the tight labor market and rise in BRC retail sales suggests that consumer spending will rebound after falling 0.4 percent last month.

Australian and New Zealand Dollars Extend Gains, Canadian Dollar Breaks Down
The Australian and New Zealand dollars ended the week not far from their year to date highs despite mixed economic data and softer gold prices. New Zealand retail sales weakened in December, providing evidence that the economy is slowing more quickly than its Western neighbor. A lot of economic data has been released from Australia and New Zealand over the past few days so it is surprising that next week’s economic calendar is almost completely devoid of Australian or New Zealand data. Instead, the market’s focus will be on the Canadian dollar, which sold off aggressively today. We expect volatility in the pair to continue with consumer prices, international securities transactions, leading indicators and retail sales scheduled for this coming week.

Kathy Lien is the Chief Currency Strategist at FXCM.