Dollar Can't Buy a Break
US economy is slowing down. There was no clearer evidence of that fact last week than the failure of Retail Sales to meet expectations. Ex gasoline retail sales increased a measly 0.1% vs. 0.7% forecast and put the final nail in coffin of the dollar bull's argument that the US consumer will remain resilient in the face of higher oil prices and rising interest rates. To add insult to injury Friday's U of M plunged to 79.0 from 86 0 projected suggesting that Mr. and Mrs. America are going  to curtail spending even further. The grand theme in the currency market that appears to be dictating trading at the present moment is that EU and UK economies are enjoying a renaissance while US is headed for a slowdownââ,¬Â¦most market participants continue to view the US rate hike policy as nearing its end and therefore losing its effectiveness in supporting the dollar.

Next week brings the TICs report, a slew of housing data and Industrial Production results. TICs may well set the tone for trading  for the front part of the week. If it shows a second straight month of more than ample surpluses ($75 Billion or greater) against what for now at least appears to be a slightly contracting Trade Balance deficit, perhaps it can stem the slide of the greenback. But the retrace is likely to be short lived. With dollar negative sentiment prevailing throughout the FX market and the 1.3000 within pips of reach, the dollar's turn for the better could be fleeting at best.

Euro, a Relative Bull?
The euro has advanced against the greenback for 19 out of the past 22 sessions. However, the currency continues to loose ground against the yen, franc and pound; suggesting that the reason for the move has more to do with  dollar bearishness than euro bullishness.  Nevertheless,  euro bulls had little to complain about this week as economic releases from the region were overwhelmingly positive.  Euro-zone data impressed with a OECD March leading indicator index and April retail activity both beating previous month figures.  Member data was just as positive as the aggregate numbers.  French industrial production bounded 1.6% higher for March as political tensions abated.  Meanwhile Germany , the Eurozoneââ,¬â"¢ s largest member was coincidentally the bullish leader.  Growing demand from abroad for German goods  led the trade balance to swell to 14.3 billion in March factories in turn reported the activity with increased factory orders. The only disappointing data point for the whole week was the shortfall in GDP over the first quarter.  Being the largest economy in the Euro-zone, and therefore the unofficial  bellwether for the whole region, the drop indicated that EZ recovery was still vulnerable to a downturn.

The coming weekââ,¬â"¢s schedule will be thinner but more concentrated.  A ZEW survey, CPI and industrial production indicator are all on the docket for the Euro-zone.  Most of the data is expected to post a slight contraction in month to month comparisons. However, whether any of this potentially bearish news has any impact on the euro run will most likely depend on the results from the US side of the pair.

No Crossing the 110 Line?
In Japan, our favorite gauge of consumer sentiment ââ,¬â€œ the Eco Watchers survey ââ,¬â€œ receded from its peak levels, printing at 54.8 versus 57.3 the month prior. While still well above the 50 boom/bust level, the report suggests a mild a slowdown in consumer demand in April which in turn is likely to push any consideration of lifting of ZIRP to September rather than June or July. If US demand precipitously slows, Japanese policy makers will be even more reluctant to lift interest rates prematurely. All of which raises the following question. If everyone loved the carry at 120 USD/JPY and 450bp spread, how come the market hates it at 110 USD/JPY and 500bp spread?

Despite the mixed economic results the yen posted the second biggest rise against the greenback for the week gaining 222 basis points.  The continuing momentum of the move is spurred by speculation that the carry trade unwinding will persist with no pause. Yet as we noted, Japanese policy makers are becoming materially concerned with the scope of yen appreciation. For the first time in years they have hinted at the possibility of intervention and if the stronger yen begins to ruin the profit margin of the country's vital export sector, those hints may turn into action.

Next week two countervailing forces will likely determine the tone of yen trading. On Monday CGPI results will be scrutinized heavily by FX traders to ascertain if inflation is truly making a comeback in Japanese economy. On Thursday, preliminary GDP results will provide the market with better understanding of the strength of growth in Japan . Should inflation be tame and growth more muted than the market expects, the yen rally may see a retrace as suddenly the 500bp interest rate differential will look attractive once again.

A Sea of Economic Green
Economic data for this past week went six for six, with each market-worthy indicator coming out of Europeââ,¬â"¢s second largest economy beating expectations.  Sterling bulls were slow out of the gates on Monday despite rises in input and output producer prices and the BRC retail sales monitor, all for April printing higher than forecasts.  With each of these three indicators on the rise, the inflation sentiment was undeniable while additionally sapping former BoE member Stephen Nickellââ,¬â"¢s claims that consumers were in a worse state than MPC thought.  Two days later, the trade for March recorded a sizable contraction in deficits ââ,¬â€œ beating both former figures and expectations.  However, the real market action, 300 pips of it in fact, was reserved for Thursday.   Industrial and the smaller manufacturing sectors long the weakest parts of the UK economy, surprised to the upside and sealed the notion that UK economic recovery was back on track. 

The seemingly unstoppable sterling now has the 1.90 handle as its next obstacle to conquer.  Having not seen the north side of this figure in over a year, and having particular sway as a psychological - read even ââ,¬â€œ figure, the unit will need some hefty fundamentals to break through.  This weekââ,¬â"¢s offerings just may be up to the task.  The housing sector will be represented by the Rightmove, ODPM and RICS price measure ââ,¬â€œ all for different months.  Retail sales and the jobless rate will sum up the consumer.  And finishing everything up will be the inflation situation with Aprilââ,¬â"¢s consumer basket.  While posting in line with expectations may be positive for the economy; the upside surprise may be needed to continue cableââ,¬â"¢s rally against the dollar.

Coasting on Fundamentals
Tacking on an additional 300-plus pips against the benchmark dollar this week, the franc has all together advanced 9% or 1200 pips against the greenback in as little as two months.  Keeping the good times rolling for the past week were an employment and consumer confidence indicator, both of which were dressed to impress.  Unemployment in the Swiss nation dropped to a three-year low 3.4%, adjusted for seasonal swings, as firm profits continue to find its way into consumersââ,¬â"¢ hands through capital investment. Though an obvious improvement for the roaring economy, the actual posting was exactly in line with heavy market expectation which in turn produced a delayed 100-pip advance.  The real action was provided by a better than expected boost in consumer confidence.  The SECO-measured survey revealed the Swiss were the most optimistic they have been since the third quarter of 2001.  Encapsulating much of the juice the economy has kicked out, the polled were beaming from a solid labor market, growing wages and the general strength of the economy.

This coming week will be one of rest for Swissie news wires. With only the tentatively scheduled April producer and import price index even remotely on the marketââ,¬â"¢s radar, the unit is likely to take its bearings from cross currency releases while also sticking to its momentous trend.  Though the trend has been well entrenched, a retrace is due.  If geopolitical tensions cool off further, watch for the Swissie to retreat especially on the crosses.

Boris Schlossberg is a Senior Currency Strategist at FXCM.