• Fiscal Year End May Tempt Bank of Japan to Leave Rates Unchanged
• Strong Trade Balance Expected to Have Larger Reaction in Dollar than Weak Number
• Bank of England Expected to Leave Rates Unchanged

US Dollar
On a day devoid of any major economic data, the dollar gave back some of its gains.  Tomorrow we are expecting the trade balance report, which should inject a bit of volatility in the markets.  A good number will probably cause a larger reaction in the market than a poor number.  The market has already bid up dollars in anticipation of a very strong non-farm payrolls number.  A sharply better than forecasted $66.5 billion trade deficit figure could send the EUR/USD tumbling to the bottom end of the 1.1800 handle and USD/JPY soaring above 118.00.  A poor number on the other hand, depending upon how bad it is of course, will probably only result in a modest rally in the EUR/USD and corresponding sell-off in USD/JPY.  Traders will be much more conservative with short dollar positions ahead of payrolls.  Just this morning, the Hudson employment index surged 5 points, solidifying expectations that this one could be the big one.  As we had postulated, Ben Bernanke stuck to script today and spoke only about community banking, avoiding any comments about the economy or monetary policy.  The dollar is also weaker because geopolitical tensions are heating up once again.  Iran said that they will continue with their nuclear research and development.  A Reuters article cited a US statement that said the UN is set to demand Iran to stop their nuclear program or face dire consequences.  If this were true, then tensions with Iran would be turned up a notch, which would certainly not be positive for the US dollar.  Meanwhile the Reserve Bank of Australia left interest rates unchanged last night, as expected.   The RBNZ also left interest rates on hold and to the surprise of some, they refrained from hinting that they may be considering lowering rates in the future. 

Euro
Like the US, the Eurozone economic calendar was completely empty today.  The Euro gained ground modestly, as ECB officials continue to make hawkish comments.  ECB member Weber is the latest to join Garganas and Trichet to call for tighter monetary policy.  He warned that inflation risks over the medium term are still very prevalent.  The improvements in the Eurozone economy has provided good reason for the ECB to consider raising rates at least once and possibly even two more times this year.  German industrial production figures due out tomorrow are expected to confirm gradual strength. 

British Pound
The British pound also strengthened against the dollar today ahead of what will be an extremely busy day in the UK tomorrow.  Not only is the Bank of England set to announce their decision on monetary policy, but the UK is also due to release their trade balance, industrial production and HBOS house price figures.  The BoE is expected to leave rates unchanged at 4.50 percent and when they do, they do not followup the decision with any comments.  These days, the minutes for the BoE meetings are probably more closely watched than the actual interest rate meeting itself.  Most of the data due out tomorrow is forecasted to show improvements in the UK economy.  As we mentioned yesterday, the UK economy is very much in limbo right now.  Data has been mixed to better, which has helped the Bank of England shy more towards neutral than dovish.  This morning, we saw a much better than expected BRC shop price index and a sharp rise in house prices as measured by the Halifax survey.  However, the Nationwide UK consumer confidence survey dipped, which puts to question whether retail sales will continue to rise. 

Japanese Yen
The Japanese Yen has remained mostly unchanged against the US dollar.  The much awaited monetary policy decision by the Bank of Japan is set for tonight.  Most of the market expects the central bank to leave policy unchanged, but there is a very prevalent risk that they could also drop quantitative easing, but refrain from immediately raising interest rates. However the fact that we are so close to Japanâ�,��"�s fiscal year end may be a reason for the central bank to postpone removal of quantitative easing in fear of adding to seasonally tight liquidity.  The BoJ has been hawkish for some time and only recently has the Japanese government given their nod of approval to actually start reducing the excess stimulus in the economy.  Economic growth has been improving for quite some time now and last nightâ�,��"�s data provided an added confirmation of this reality.   Both the Eco watchers â�,��"man on the streetâ�,� survey and leading indicators came in strongly.

Kathy Lien is the Chief Currency Strategist at FXCM.