• Is the Dollar's Rally Sustainable?
• Watch Out for Swiss Data Tomorrow
• Yen Continues Tumble on More Evidence that ZIRP is Here to Stay

US Dollar
As we had pointed out yesterday, durable goods came out stronger than expected, giving EUR/USD traders the green light to take a shot at 1.2150.  For the third consecutive day, the dollar has reigned king thanks to a dose of good data, a strong rally in the stock market and optimism that Russia and Iran may have found a solution that could satisfy the US and EU in hopes of putting an end to the global stalemate over nuclear power.  The market has become increasingly convinced that the Fed will follow-up this month's rate hike with another one in March.  Fed fund futures are now pricing in a 72 percent chance that we will see 4.75 percent rates on March 28th, which is up from a 50 percent chance last week.  Even if this is true, we wonder how much optimism there really can be in the US dollar with the outlook for the US economy still murky.  Admittedly, durable goods and jobless claims were both stronger.  Orders for durable goods increased 1.3 percent in the month of December following an upwardly revised 5.4 percent rise in the previous month.  Orders excluding transportation were up 0.9 percent, just a bit shy of the market's 1.0 percent forecast.  However, the revision from -0.6 percent to +0.6 percent in November more than made up for the difference.  Jobless claims increased 11k to 283k, which was a smaller than expected rebound after last week's slide to 5 year lows.  On the flip side, the dollar's rally could face fierce resistance at the 1.2150 level as speculation for a Chinese New Year (this weekend) revaluation escalates with Senator Grassley threatening another sanction bill for China if they fail to make any more adjustments.  Furthermore demand for two year Treasuries at yesterday's auction was the weakest in nine months.  Additionally, we are keeping a close eye on the housing market, especially with new home sales due for release tomorrow.  According to one of our favorite economic blogs written by Michael Shedlock, there are reports of fire sales on homes in Washington DC.  Home builder Centex is offering a 12 hour seller pays all closing costs, $100,000 off and 100 percent financing sale in 9 locations.  Time Magazine also has an article this week titled "Vegas Condos Go Cold."  According to their report, condo builders have already called off 3 high profile projects and experts are now forecasting that "only a quarter to half of the six dozen originally proposed projects will ever be built."  If these are not signs of a slowing housing market, we don't know what is.  At this rate, even if we do get 4.75 money, can the Fed really justify bringing rates to 5.00 percent?  Ultimately, the end of rate hikes is near, it is not a matter of if, but just a matter of when.

Euro
The only piece of economic data released out of the Eurozone of any consequence today was the Italian trade balance, which increased by EUR129 million in the month of December.  With the Euro's recent retracement, those hoping for a continued recovery in the Eurozone can finally breathe a sigh of relief.  For the time being at 1.22, we are still sitting pretty, but at 1.25, all bets are off.  There is virtually no possibility that the ECB would be willing to increase interest rates if the Euro was at 1.25.  A rate hike at that currency value will only exacerbate the Euro's rally, pushing it towards 1.30 and putting the entire Eurozone recovery at risk.  The ECB or any central bank for that matter would probably be too cautious to risk an already weak recovery.  Unfortunately the Euro does not have much to work off of tomorrow with only German GFK consumer confidence and money supply due for release.  Instead, any direction should be dictated by surprises in the US' GDP and new home sales report.  There was also some interest in Switzerland today as SNB Chairman Roth confirmed the central bank's 1.5-2.0 percent growth forecast for the year. The KoF leading indicators report is due for release tomorrow as well as retail sales so that should definitely make for some interesting Swiss Franc led trading, which is not something we see quite often. 

British Pound
There has been little action in the British pound today.  The market has been fairly quiet with no economic data scheduled for release which confirms that the dollar's is what pounded the currency lower. Tomorrow, we are expecting the Nationwide house price report.  There has been increasing evidence of stabilization in the sector, so there is no reason to expect otherwise.  Comments from incoming Deputy Governor Gieve was of brief interest today.  He refused to be labeled a hawk or dove, but judging from his responses to questioning, he may be siding with one more than the other.  When asked about his view on higher oil and interest rates, he said that he was not sure whether higher interest rates were required since higher oil prices is negative for growth.

Japanese Yen
The dollar continues to exhibit the greatest strength against the Japanese Yen. The merchandise trade surplus for the month of December increased from JPY597.3 billion to a less than expected JPY914 billion.  On an annualized basis, the trade balance has fallen by close to 20 percent, but thankfully imports and exports have still shown a healthy improvement.  Meanwhile, there was a great point made by Marc Chandler of Brown Brothers today.  According to his report, he said that "a senior LDP official made an important comment that may prove to be very revealing. He reminded (the BOJ ?) that the CPI index will change in August and the impact of this new measurement should be seen before a change in the BOJ stance. In the past it has been recognized that the Japanese measure may overstate consumer inflation. Past revisions have generally led to lower measured inflation."  If this is the case, it is another reason to add to our laundry list of reasons why the BoJ will not be able to end their zero interest rate quantitative easing policy anytime soon.

Kathy Lien is the Chief Currency Strategist at FXCM.