Is the Euro Rally Over?
The Euro plunged over 250 pips today, leaving many traders wondering whether the currency’s rally has officially come to an end. According to our Technical Analyst Jamie Saettele, the dollar rally could continue for months. Our FXCM Speculative Sentiment Index is also growing less short, which suggests that the currency’s rally could be losing steam. Fundamentals are beginning to turn in favor of the dollar with the Philadelphia Fed manufacturing index rebounding in the month of March and Eurozone PMI numbers falling short of expectations. However is the Euro’s rally really over? That depends upon what time frame you are looking at. For the next 24 hours the dollar could continue to weaken, but from a fundamental perspective, the dollar should resume its slide in the coming weeks. The market is simply relieved that the recent measures by the Federal Reserve are restoring some stability across the financial markets. Yet, inflation is still a big problem for the Eurozone with German producer prices rising much stronger than expected last month. In fact, the German economy is still holding up well with activity in the German manufacturing and service sectors continuing to accelerate. Earlier this week BMW said that they are doing quite well despite a strong currency, higher raw material costs and weaker US growth. This goes to show that the Eurozone economy has and could continue to surprise all of us. Meanwhile with the Euro 500 pips off its high, there is no immediate threat of intervention from the ECB. French and Italian consumer spending reports are the only numbers due for release tomorrow with most traders off for Good Friday.

Why the Dollar Could Resume Its Slide
In addition to stability in the Eurozone economy, there are also many reasons why dollar weakness could reverse the recent slide in the EUR/USD. Over the next 2 weeks, we have a lot of US economic data that could resurrect speculation of a deeper interest rate cut from the Federal Reserve. We are expecting existing and new home sales, consumer confidence, manufacturing ISM and non-farm payrolls. Given the record amount of foreclosures being reported, there is little likelihood that existing and new home sales will be strong. The latest jobless claims report also points to trouble ahead. We have previously mentioned that job losses could build up in the coming months. Back in 2001 and 2002, the last time growth in the US slowed materially, we saw 15 consecutive months of negative job growth. The sharp jump in jobless claims last week confirms that the labor market will continue to deteriorate as the level of jobless claims ties the high in January, which was the worst since Hurricane Katrina. The rebound in the US dollar, bond yields and the stock market does indicate that risk aversion is subsiding, but as we have seen over the past week alone, risk appetite can come and go in a blink of an eye. We believe that traders have forgotten the possibility that jobs could be cut for three consecutive months. This morning Citigroup announced plans to layoff up to 5 percent of their staff, which is on top of the layoffs that are expected at Bear Stearns.

British Pound Soars on Surprisingly Strong Retail Sales Report
The British pound is the only currency that has managed to strengthen against the US dollar today. This was due entirely to a much better than expected retail sales report. The market had been looking for retail sales to drop by 0.2 percent, but instead consumer spending grew by 1 percent last month. Apparently strong food sales have offset any slowdown that would have come from less discounting. At face value, this appears to indicate that consumers have not slowed down, which reduces the possibility of aggressive easing by the Bank of England for the remainder of the year. Basically unless these numbers reverse themselves sharply next month, the Bank of England will probably only ease interest rates by another 25 instead of 50bp. The Bank of England however continues to pump money into the financial system which indicates that they are not completely comfortable with the current liquidity conditions.

Dow Rallies 260 Points, But Only Some Carry Trades Recover
US stocks have been on a rollercoaster ride with three hundred point intraday swings becoming the norm. For this reason, not all carry trades have participated in the move. Only GBP/JPY and USD/JPY have ended the US trading session higher with EUR/CHF and all of the other Yen cross sharply lower. This confirms our general belief that carry trades will continue to suffer. Volatility remains high which means that the currency market is still very nervous. Meanwhile the leadership vacuum continues at the Bank of Japan. Another candidate has been rejected and this comes at a very odd time for the Japanese government. However the April 11 finance ministers meeting in Washington looming, we believe that the Japanese Government should find a new leader by that time.

Canadian, Australian and New Zealand Dollars Continue to Slide Amid Lower
The Canadian, Australian and New Zealand dollars continued to plummet against the greenback. Oil and gold prices are still softer after yesterday’s sharp slide which is contributing to the weakness of the commodity currencies. If the slide continues, which it could just on a short term basis as hot money takes profit, the Australian, New Zealand and Canadian dollars could continue to suffer. Canadian leading indicators and international securities transactions were weaker than expected, which is hardly surprising given the growing strains in the Canadian economy. Gold and oil markets are closed tomorrow, which means that there could be comparatively limited volatility.

Kathy Lien is the Chief Currency Strategist at FXCM.