Dollar Sees Sharp Advance As Traders Not Ready To Give Up On Rebound
Once again the US economic calendar was relatively light; and yet the greenback was able to ratchet significant gains against most of its major counterparts. What’s more, the currency’s sharp advance was made all the more unusual as the few economic indicators that crossed the ticker were disappointing. The morning’s headline report was the National Association of Realtors’ pending home sales report for March. This indicator was already handicapped as a fundamental mover as it is considered the laggard behind the new and existing sales numbers which were reported in previous weeks. Altogether, the number was met with little interest as the 1.0 percent contract met expectations; but fundamentally, this is still a very discouraging number for the housing recession. Representing the second monthly contraction, pending home sales (which could be considered more a leading indicator than existing sales as it records open contracts) slipped to the lowest level on record. The other notable release was the Federal Reserve’s consumer credit report. Debt-funded purchases rose to a five-month high $15 billion, suggesting rising prices and layoffs were forcing Americans to resort to credit for shopping. Outside the confines of the docket, US policy makers were once again trying to revive confidence in the credit market. The US Securities and Exchange Commission announced it would require investment banks to disclose capital and liquidity levels going forward. The real question though is whether this will help bring an end to the current credit crisis or if this will merely be a burden for firms in good market conditions.

Euro Tumbles As Retail Sales Reflect Economic Slowdown, Will the ECB Stay Hawkish?
The Euro plunged over 100 points versus the greenback on Wednesday, as Euro-zone retail sales missed consensus forecasts and fell 0.4 percent during the month of March. However, as we mentioned yesterday, the drop the weak German spending figures we saw for the same period served as the perfect leading indicator for the headline Euro-zone release, as the country’s economy is the largest in the region. A 0.6 percent drop in German Factory Orders certainly didn’t help the euro’s case either, and only added to speculation that the European Central Bank will have no choice but to focus more on deteriorating growth during their meeting on Thursday. However, as we mentioned in our outlook for the ECB rate decision, upside prices pressures continue to be the main area of concern for the ECB President Trichet. While we saw estimates for Euro-zone CPI in April plunge to 3.3 percent from 3.6 percent, this is still well above the ECB’s 2 percent target as energy and food costs remain high. Trichet’s emphasis on inflation rather than growth stems from the ECB’s mandate, which in contrast to the Federal Reserve, commands the Bank to maintain price stability rather than stimulate growth. As a result, there is a good chance the ECB will remain hawkish, but how the euro trades after his commentary will be contingent upon whether or not Trichet focuses primarily on the downside risks to the economy or persistently tight credit conditions

British Pound Hit Hard As UK Data Raises Chances of BOE Rate Cuts
The British pound made a decisive break below critical support at 1.9600/50 on Wednesday morning, as UK data was weak all around. First, Nationwide’s measure of consumer confidence plunged to 70 from 77, the lowest reading since record-keeping began in May 2004. Meanwhile, industrial production unexpectedly fell 0.5 percent during the month of March, led by weakening output of manufactured goods like cars and electric, gas, and water supply. The news suggests that economic growth in the UK is being held back by not only waning consumer and business spending, but also foreign demand amidst a global slowdown. The news only added to speculation that the Bank of England will cut rates on Thursday morning, especially as the minutes from the last Monetary Policy Committee meeting – when the BOE cut rates to 5.00 percent – showed that they are much divided in their stances. Indeed the minutes showed that six members voted for the 25bp cut, two members voted for no change, and one member voted for a 50bp cut. Nevertheless, the BOE tends to take a slow-and-steady approach when it comes to changing monetary policy, and given the upside risks to inflation looming from booming commodity prices, they are very likely to leave rates unchanged. Furthermore, given the recent drop in the British pound ahead of this meeting and mixed speculation on the outcome, the lack of a rate cut could be enough to give the currency a boost on the decision. View our outlook for the BoE and ECB rate decisions and it’s possible impact on EUR/GBP.

Commodity Currencies Drop On Risk Aversion, Event Risk Looks To Rise
The comm bloc gave back all of its gains from Tuesday and then some. Fading yield appetite and economic data proved to be a bigger draw than volatile commodity markets. Initially, the yield-laden Australian and New Zealand dollars were sent tumbling as a market-wide rise in risk aversion pushed each more than 100 points lower against its US counterpart. The kiwi’s decline accelerated after reporting a 1.3 percent drop in employment through the first quarter – the sharpest contraction in 19 years. Looking ahead, the Australian currency is looking at significant event risk in the ever market moving employment change. Loonie traders will have housing starts data to work with.

Yen Advances As Speculation Of A BoJ Rate Hike This Year Grows
Yen crosses were on the retreat Wednesday as the carry-trade favorite garnered supported from a market-wide swell in risk aversion and growing speculation that the Bank of Japan may have to lift lending rates in order to quell inflation pressures that have reached a decade high. The policy authority, like other major central banks, has had to balance fading growth trends with oppressive inflation. The market has almost fully priced in a quarter-point rate hike from the Japanese bank over the coming 12 months.

Kathy Lien is the Chief Currency Strategist at FXCM.