• Sustainability of Consumer Spending Comes to Question With Retail Sales Due
• Euro Bulls are Expecting Sharp rise in ZEW
• Yen Finally Rallies After Six Consecutive Days of Weakness

US Dollar
The US dollar sold off against all of the majors today and justifiably so.  The cards are stacking higher and higher against the greenback as we head into what is expected to be a fairly volatile week.  An article in the Wall Street Journal and an announcement by the U.A.E helped the Euro recuperate all of its non-farm payrolls induced losses.  This weekend's Wall Street Journal has picked up on an issue that we first brought up in our 2006 outlook, which is that a quarter of all adjustable rate mortgages are set to reset to market rates this year and next.  This is estimated to amount to approximately $2 trillion worth of mortgages, with the majority being sub-prime mortgages, which have the highest default risk.  Going into tomorrow's retail sales report, we turn our focus to the major uncertainties impacting the sustainability of consumer spending.  Not only will many mortgage payments increase by hundreds of dollars a month, consumers are also facing higher minimum credit card payments.  At a time when the housing market is showing signs of slowing and oil prices have refused to break below the $60 a barrel mark, we wonder how much longer consumers can really continue to dip into their savings, which are already at record lows.  Meanwhile in response to the failed Dubai Port deal, the U.A.E announced plans to shift 10 percent of their reserves to Euros.  Nearly all of the U.A.E's estimated $28 billion reserves are now in US dollars.  Although 10 percent of that is a paltry amount considering the volume that goes through the FX markets on a daily basis, symbolically, it is very important.  Reserve diversification is a topic that we expect to return to the headlines repeatedly over the next few years, especially since countries like Iran are talking about offering oil priced in Euros later this month.  Yet these are all factors that are negative for the dollar over the long term.  In the short term however, interest rates seem to be the market's only focus.  Friday's solid triple digit non-farm payrolls report has some talking about 5.25 percent rates as the cap instead of 5.00 percent.  This week's data and Fed speak will be critical in helping the market get clearer insight on whether the Fed thinks that the economy has what it takes to justify overshooting interest rates.  Finally, some focus has been on comments by Fed President Yellen.  Typically seen as a very respected central banker, Yellen backed up Bernanke's stance on shifting to an inflation target. 

Euro
Today's strong rally in the Euro suggests that bulls are gearing up for a blockbuster ZEW report. With the economy showing signs of recovery and unemployment holding steady, analyst sentiment is expected to rise to 71, matching the 2 year high it hit back in January.  Members of the European Central Bank and the EU unanimously agree that economic growth is gaining strength.  With the Euro struggling to rally, exports should continue to benefit.  Aside from the ZEW survey, higher inflation in France is also predicted to lend support to the single currency.  After a dip in January, consumer prices are expected to rise by 0.4 percent.  However we have will have to wait until Thursday for the entire Eurozone's inflation figures to be released.  Inflation is expected to be above the central bank's target, validating their need to raise interest rates further. 

British Pound
The British pound staged a nice rally against the dollar today, but unlike the Euro, the pound was unable to erase all of Friday's losses despite stronger UK data.  Producer prices on the output side rose 0.3 percent in February, which was slightly more than the market's forecast.  Input prices remained flat compared to the market's 0.3 percent forecast indicating that producers are passing more of their previous cost increases over to consumers.  In January, input prices surged by 1.7 percent while output prices rose a measly 0.4 percent.  This month, even though input prices did not budge, producers continued to raise their prices.  Meanwhile the housing market is also showing more signs of stabilization.  According to the Office of the Deputy Prime Minister, house prices surged 4.3 percent in January, up from 2.9 percent in December.  This comes after a string of positive housing market reports that we received last week. 

Japanese Yen
After six consecutive days of strength, the dollar has finally seen a red day against the Japanese Yen.  Comments from Bank of Japan official Mizuno helped to spur gains in the Yen as he hinted to the need for a more aggressive monetary policy.  Citing the bubble of the early 90s, he said that one of the most important lessons that should have been learned is the importance of forward looking monetary policy.  Although Mizuno is typically one of the more hawkish policy makers, his words were enough for some Yen bears to take profits after such an impressive move last week.  Data released last night also helped to fuel gains in the Yen.  Fourth quarter GDP was revised lower to 1.3 percent from 1.4 percent, but the revision downward was less than expected.  The current account surplus fell from JPY1.7 trillion to JPY719 billion, but like the GDP report, that too was better than expected.  Consumer confidence rebounded slightly from 49.5 to 49.9 and even though the confidence was below the all-important 50 expansion/contraction line, it still indicates that consumers are growing less pessimistic.

Kathy Lien is the Chief Currency Strategist at FXCM.