After multiple attempts last week, the EUR/USD finally broke the 1.2000 barrier in early Asian trade and has been on the defensive for most of the European session. With political situation in Germany still unresolved and US economic data decidedly better than expected the market may now begin pricing in the possibility of 4.5% US rates by the beginning of next year. Such a wide interest rate differential between the greenback and the majors should keep the unit well bid for the time being.

Last week, several key US releases including Durable Goods which printed at 3.3% versus 0.7% expected and Chicago PMI which recovered the 50 boom/bust handle in a very decisive manner by posting 60.5 reading, contributed heavily to create a dollar friendly environment. The data indicates that the negative post Katrina effects on the US economy have been negligible so far. How long can US consumer demand maintain its pace in the face of rising rates and $3/gallon gas remains to be seen, but until shown differently, the market is offering the benefit of the doubt to dollar bulls.

Boris Schlossberg is a Senior Currency Strategist at FXCM.