Euro Breaks 1.55, Where Is it Headed Next?
What makes today’s record breaking day in the EUR/USD particularly unique is the fact that the currency pair is now trading above the psychologically important 1.55 level. Data wise, its been a quiet day in the currency market, but comments from European officials, the continual rise in oil prices, a drop in US credit spending and widening credit spreads have all contributed to the Euro’s rise. At the ECB’s meeting with the Gulf Cooperation Council today, Trichet was asked whether the Euro’s move was brutal. He repeated that he was concerned about excessive moves on the exchange rate, but at the same time, he warned that it is “very important” for the ECB to continue to “inspire confidence by solidly anchoring inflation expectations.”

Once again, inflation is the central bank’s top focus and they will not be willing to compromise their priority. In other words, do not expect the ECB to stop the Euro’s rise anytime soon and for this reason, we could easily see a move above 1.56, which is the wave 5 objective of our technical analyst Jamie Saettele. From a fundamental perspective, Eurozone economic data continues to surprise to the upside.

This morning, we learned that Eurozone industrial production rose 0.9 percent in the month of January. French current account, non-farm payrolls and Italian consumer prices are due for release tomorrow along with the ECB monthly report. These numbers are generally not market moving but the US retail sales report will have a big impact on the EUR/USD. If consumer spending is weak, like we expect, 1.57 could be an achievable target. Meanwhile the Swiss National Bank has an interest rate announcement scheduled for tomorrow. The earliest that they are expected to cut interest rates is in the fourth quarter.

Will Consumer Spending Crush the US Dollar?
The US dollar fell to a record low against the Euro today and is within pips of closing in on its 8 year low against the Japanese Yen. The latest move in the currency and bond markets suggest that traders are suspicious of whether the Fed’s action yesterday will have a lasting impact on the financial markets. Rate cut expectations have also rebounded with the market now pricing in a 74 percent chance of a 75bp rate cut next week, up from a 62 percent chance yesterday. How much the Fed actually eases will be largely dependent upon tomorrow’s retail sales report. With US corporations cutting jobs two months in a row and foreclosures rising, consumer spending will certainly suffer. According to MasterCard’s data, spending In the month of February dropped 1.1 percent, their largest decline in 5 years, when they first started tracking the data. However, the absolute value of retail sales could increase because gasoline and food prices are on the rise. It is therefore important that traders watch not only the headline numbers, but also the details of the consumer spending report. Don’t forget that import prices will be released at the same time as retail sales.

Prices are expected to rise but it should only have a limited impact on the US dollar. The bigger market mover is undoubtedly the retail sales report. Meanwhile, at the Gulf Cooperation Council, Qatar confirmed that they will be keeping their US dollar peg while the Saudi Monetary Authority called the US dollar a good buy. An article in the Wall Street Journal today talks about the degree of Middle Eastern investment into the US real estate market. With the dollar continuing to fall, these investments could pick up pace, providing support for the ailing housing market.

Australian and New Zealand Dollars in Play
The Australian and New Zealand dollars will be in play tonight with the Australian employment report and New Zealand retail sales due for release. After two strong months of job growth, we expect the labor market to slow materially especially after Westpac reported that consumer confidence fell to the lowest level in 15 years. As for New Zealand, stronger credit card spending points to stronger retail sales.

Meanwhile the Canadian dollar has also gained strength against the greenback thanks to surprisingly good economic data earlier this week and the continual rise in oil prices. We are closing in on $110 a barrel and as long as the US dollar continues to fall, oil prices will continue to rise. Canadian capacity utilization is due for release tomorrow, but that should not have any meaningful impact on the CAD.

British Pound Hits 2-Month High
The British pound rallied 230 pips to a 2 month high against the US dollar today. As we expected, the trade deficit narrowed in the month of January as the weakness of the sterling against the British pound drove up the volume of good sold to EU countries. The pound weakened against the Euro which tells us that the move in the GBP/USD may be due just as much to the strength of the British pound as the weakness of the US dollar. EUR/GBP on the other hand continues to gain strength as the monetary policy and economic data of the Eurozone come in stark contrast to the US and UK.

Japanese Yen Recovers on Stronger GDP
The Japanese Yen is trading within pips of its 8 year high against the US dollar. GDP growth in the fourth quarter was revised up from 0.6 to 0.8 percent, due largely to an upward revision to inventory investment. The Corporate Goods Price Index was also stronger than expected. In fact, the pace of growth was the fastest since 1981. However the current account surplus and confidence fell short of expectations as the strength of the Yen and weakness of the US dollar weighs on exports. This mixed bag of Japanese economic data gives us little indication on the impact that the US slowdown is having on the Japanese economy to date.

Kathy Lien is the Chief Currency Strategist at FXCM.