US Dollar
The US dollar started this exciting and possibly volatile week firmer against all of the major currencies. With the combination of yield, oil and growth on its side, the greenback has brought itself right back into the range trading mode that we have become all too familiar with over the past few weeks. The lone dissenter was the dollar's momentum against the Japanese yen, which continued to aim for the clouds. Not only are we expecting a heavy load of data from around the globe this week, but tomorrow we have another FOMC meeting scheduled and on top of that, Greenspan is due to testify to Congress about his economic outlook on Thursday. Everyone should be sticking to the well publicized script that calls for another quarter point rate hike along with an accompanying statement that should elude to the need for more work to be done. The Fed will certainly want to make sure the market realizes that tomorrow's quarter point rate will not be their last. Still, we will be on the lookout for any tiny shifts in the statement that may suggest that either inflation pressures are subsiding or that we may have to reset our expectations that the Fed will follow each rate hike with another one because the Fed will have to pause eventually. Meanwhile, aside from the expectations for higher yield, oil prices have also retreated below $60 a barrel, while the Chicago PMI and personal income numbers both delivered strong upside surprises. This paves the way for a strong ISM number tomorrow morning, which should help the greenback extend its gains. We would not be surprised if Tuesday, with its heavy data actually becomes less exciting than Thursday or Friday. On Friday, initial jobless claims could prep the market for Friday's non-farm payrolls report while non-manufacturing ISM gives the market something to trade off of as they wait for Greenspan's testimony and what usually becomes a 2 hour question and answer session.
Euro
Weaker German retail sales figures in the face of strong US data gave the Euro yet another reason to give back much of last week's gains. Even though the lower value of the Euro has been stimulative for the business sector, the benefit to the average citizen seems to be lagging. Taking a look at today's data, we can see that in Germany specifically, high unemployment rates along with high energy prices and political uncertainty gave German citizens a good reason to be thriftier than usual. Yet the hope is that improvements in the business sector will eventually filter into consumer sector is still very valid given the persistently hawkish comments by ECB officials. This week, the Eurozone economic calendar is littered with manufacturing and service sector data. Based upon the estimates, improvements are expected across the board, but this week it will really be matter of what is more important * US or Eurozone data.
British Pound
Like in the Euro, weaker UK data has given the British pound a good reason trade lower against the dollar. Consumer confidence took a nosedive in October down to -8 from -5. The market had actually expected confidence to remain stable with some calling for an improvement. Consumer lending also came in slightly below expectations at GBP 7.7 billion vs. GBP 7.8 billion while net consumer credit eased from GBP 1.3 billion to GBP 1.2 billion. Today's economic releases only further validate our belief that the Bank of England will be keeping their rates unchanged for some time. However, it is still far too early to think that the pound would resort itself to letting dollar developments dictate the direction of the GBP/USD for the rest of week. Manufacturing sector data is due for release tomorrow and it still remains to be seen whether there will be improvements. Meanwhile offsetting some of the bearish sentiment was positive mergers and acquisitions news for the UK stock market. Spain's Telefonica announced that it plans on buying Britain's O2 Plc for GBP 17.1 billion cash. Such a large pure cash based transaction will surely have an impact on the FX market, but the details of financing still need to be seen before the impact can be fully assessed.
Japanese Yen
Over the past two months, the dollar has rallied 6.3 percent or over 600 pips against the Japanese Yen. Even though more encouraging economic data was released out of Japan last night and the stock market rallied strongly, traders have completely shrugged off its significance, choosing instead to focus solely on the currency pair's growing interest rate differential. The manufacturing sector continued to improve in the month of October with the purchasing managers' index hitting a 14 month high of 54.7. The index is now in solid expansionary territory and confirms the gradual improvements that we have been seeing in the economy as a whole. Meanwhile in their semi-annual economic report, the Bank of Japan upgraded their consumer price inflation forecast for fiscal year 2006 from 0.3 percent to 0.5 percent, adding fuel to the market's speculation that we could see an end to the central bank's zero interest rate policy next year.
Kathy Lien is the Chief Currency Strategist at FXCM.