US Dollar
Trading has been extremely quiet today with most major currency pairs ending the day unchanged against the dollar. There was little for the market to work off of with no economic data released and both Federal Reserve Presidents Olsen and Bies failing to deliver any market moving comments. For the most part, the dollar is still in limbo as the market tries to figure out how far the Fed will go. Last Friday's comments from Federal Reserve President Poole has imprinted in the heads of traders that 5.25 percent rates is quite feasible. Some banks are now even calling for 5.5 percent or 6 percent rates. If you tack on the fact that the European Central Bank threw cold water on speculation for a May rate hike and it is no wonder that the dollar is still holding onto most of its strength. Everything centers on retail sales and the trade balance in this shortened trading week (Good Friday brings forth early closes on Friday). After the sharp drop in retail sales in February, the market is looking for spending to have rebounded last month. If retail sales disappoints, we expect analysts to start screaming about the impact of the contraction in the housing market on spending. Even if sales do increase, we need to be careful and make sure that sales are not increasing just because receipts at gas stations are higher. With gas prices creeping to $3.00 gallon in some locales, we see this as more a detriment to future retail sales than a benefit. However before we even focus on retail sales, we first have to clear the air on trade. The market is forecasting a $67.9 billion deficit in the month of February, which represents a contraction of $0.6 billion, but even so there is a lot of uncertainty surrounding the report with Morgan Stanley calling for a wider deficit and Barclays calling for a narrower one. Uncertainty to us simply means one thing and that is volatility. Hopefully we will get to see more action rather than consolidation on the back of these reports.
Euro
Last week the European Central Bank confirmed to the market that they plan on delivering nothing more one rate hike a quarter. This more conservative timetable has tipped the Euro over and despite a mild recovery today, the single currency still remains under pressure. Good news on the political front should ease some of the worry that the protests in France could spill over into something bigger. French Prime Minster Dominique de Villepin announced today that it plans to drop the controversial labour reform law, which should put an end to latest round of protests in France. Yet, politics is not completely out of the way with Italian elections too close to call. Berlusconi and Prodi have both received a close number of votes which means that neither received a large majority. If this is true, Italians may be forced to go back to the polls once again and it is probably going to be a while until we get clearer results on who will become the new Prime Minister. In the meantime, this will allow the market to turn its full focus onto tomorrow's ZEW report. After coming in much weaker than expected last month, the market is betting on a nice rebound this month. Business sentiment has retained its strength and given signs that the ECB is planning on slowing down its pace of tightening, analysts may turn a bit more bullish on the economy as looser monetary conditions remain for longer. However, in all likelihood, the ZEW survey was taken before Thursday's ECB meeting and judging from this morning's French industrial production numbers which came in much weaker than expected (falling 0.9 percent in the month of February), the rebound in sentiment may not come for at least another month.
British Pound
Recovery was the theme of the day in the British pound. The Queen's currency gave back some of Thursday and Friday's gains against the Euro and ended the day unchanged against the dollar. UK data released this morning was mixed. According to the Office of the Deputy Prime Minister, house prices rose a less than expected 3.6 percent in the month of February. This comes as a grave disappointment since recent figures from private organizations have shown a gradual recovery in the UK housing market. In fact, numbers were so promising that analysts were calling for house price growth to increase from 4.3 percent to 4.9 percent. Producer prices were conflicting with input price growth slower than expected and output price growth stronger than expected. This suggests that producers are passing more price increases over to consumers. Over the next 24 hours, we are expecting the BRC retail sales monitor and the trade balance for the month of February. With the British pound showing more overall weakness than the Euro, poor data could exacerbate losses in the pound.
Japanese Yen
The Japanese Yen has lost ground against the US dollar for the third consecutive trading session despite stronger machinery orders. The market is treading carefully ahead of the Bank of Japan's monetary policy decision and the release of their monthly report. We will be looking for signs of what the central bank's timetable may be for an interest rate hike. There was a lot of fanfare last week when an advisory report suggested a rate hike could come sooner rather than later. Governor Fukui is slated to talk at a post meeting press conference shortly after the monetary policy decision. USD/JPY and EUR/JPY are trading near important resistance levels. Should Fukui be more hawkish, it would be a perect marriage of technicals with fundamentals. There is no question that everyone is sitting at the edge of their seats waiting for the Bank of Japan to make their move.
Kathy Lien is the Chief Currency Strategist at FXCM.