US Dollar: Calmer Times Ahead?
March was a very active month in the currency market. The EUR/USD hit an all time high less than 100 pips away from 1.60 while USD/JPY fell to an intraday low of 95.76. The daily ranges of these two currency pairs have also expanded as 1 month volatility in the EUR/USD reached the highest level since 2004. This suggests that volatility has hit an extreme, which means that it may soon revert back to the mean. In other words, the days of 200 pip ranges in the EUR/USD may be coming to an end. The price action in the US dollar post non-farm payrolls indicate that traders are very divided on the outlook for the US dollar and more specifically US monetary policy. Three consecutive months of job losses warrant a rate cut from the Federal Reserve, but the job numbers alone may not be enough to convince the Fed to cut 50bp instead of 25. Next week, there is barely any economic data that will shed more light on what type of action the Federal Reserve will take at the end of the month. The only meaningful US data on the calendar is the trade balance, import prices and consumer confidence which are unfortunately not scheduled for release until the end of the week. The minutes from the March 18 FOMC meeting could help, but even the Fed has probably not decided how much they should ease at the end of the month. The labor market is deteriorating and will continue to get worse. We do not expect job growth to turn positive for at least another 6 months. Dell and Motorola joined ATA and Aloha Airlines in announcing more layoffs. These 4 companies alone will shave 14k from the US workforce. Base on the outlook for growth the Federal Reserve should definitely bring interest rates down to 1.75 percent on April 30. However by doing so, they are reducing their ammunition and run they risk of stoking further inflation. For these reasons, the Federal Reserve is just as divided as the market, which means that a new trend could have difficulty manifesting itself in the coming week.

Will the ECB Acknowledge the Slowdown in Growth?
The European Central bank will be meeting to discuss monetary policy next Thursday and even though they are not expected to alter interest rates, there is a chance that Trichet could acknowledge the recent slowdown in growth. If he does, this would represent a monumental shift in commentary for the ECB Governor, which would be very bearish for the Euro. He has long downplayed the slowdown in growth to focus almost exclusively on the level of inflation. This was warranted for some time because Eurozone economic data consistently beat market expectations. However, in the past week, things have changed. Confidence within the Eurozone has fallen, consumer spending is contracting while German factory orders dropped 0.5 percent. Aside from the ECB rate decision, there are only a few numbers due for release in the coming week, which are German industrial production and the trade balance. Given the recent turn in economic data, the next move by the ECB is a rate cut and the fate of the Euro will be determined by how quickly that happens.

Bank of England: To Cut or Not to Cut Interest Rates
Of the 3 central banks holding monetary policy meetings next week, the Bank of England is the only one expected to alter interest rates. A 25bp rate cut is the current forecast even though the rate decision is really a close call. The minutes from the last Bank of England meeting revealed that one of the main reasons why the BoE did not cut interest rates last month was because they were worried about how the market would perceive a back to back interest rate cut. Inflation has picked up since then and UK economic data has been mixed, but the growing reluctance by mortgage lenders to extend new loans may force the Bank of England to take further steps to ease monetary policy. Co-operative Bank joined First Direct in withdrawing all 2 year mortgages. Halifax, the nation’s largest mortgage lender is expected to follow suit in the coming weeks. Tighter credit conditions could put further pressure on the UK housing market which will lead to more losses and defaults.
Aside from the BoE meeting, consumer confidence, industrial production and the UK trade balance will be released.

More Caution Expected from the Bank of Japan
The Bank of Japan will also be holding a monetary policy meeting, but with interest rates already at 0.5 percent, there is not much room for the central bank to move interest rates. Earlier this week, Japanese business confidence fell to a 4 year low. Although workers are benefitting from higher wages, companies are beginning to grow more pessimistic. We believe that the shift in the corporate sector due to the recent strength of the Japanese Yen should force the Bank of Japan to downgrade their economic outlook. A lot of Japanese data will be released next week including the Eco Watchers survey and the trade / current account balance.

AUD Bounces Back from Weaker Data, CAD Slips on Lower Employment Numbers
The commodity currencies are moving in opposite directions with the Australian and New Zealand dollars rising against the greenback and the Canadian dollar slipping. Australian retail sales dropped 0.1 percent last month, confirming the central bank’s fear that high interest rates and slower US growth is dampening the Australian economy. However the currency managed to shrug off those numbers on the back of higher oil prices and weak US economic data. The Canadian dollar on the other hand did not fare as well as a higher unemployment rate, smaller increase in jobs and slower growth in the manufacturing sector hangs over the currency. In the week ahead, we are expecting the Australian trade balance, employment numbers and Canadian merchandise trade. There are no New Zealand economic releases which mean that the Australian and Canadian dollars will be in play.

Kathy Lien is the Chief Currency Strategist at FXCM.