• Dollar Gains Do Not Last Long as Core Prices Fall Short of Expectations
• Hawkish ECB Comments Outweigh Weak ZEW
• Japanese Consumer Confidence Rises to 15-Year High

US Dollar
In the current market environment, the dollar never seems to be able hold onto its gains for long.  The fact that economic data is far from resoundingly positive has put to question how much longer the Federal Reserve can remain hawkish.  Today, headline producer prices increased more than expected in the month of April as energy prices skyrocket, but at the same time, the growth in core prices remained subdued, rising by a weaker 0.1 percent.  This makes core consumer prices even more important tomorrow as the Fed places greater emphasis on the core component of the report over the more volatile headline component.   If core prices do not meet up to expectations and rise only modestly, even a very strong headline number may not be good enough to turn it into a dollar positive report.  Furthermore, the housing market is also showing strong signs of weakness.  Yesterday, we saw a sharp dive in the NAHB housing market report which reflects the sentiment of builders.  Today, we saw a 7.4 percent drop in housing starts.  Both were far weaker than expected.  We have long said that if the housing market goes so will the Fed's plans to raise interest rates any further.  The only good news today was the industrial production report which rose a more than expected 0.8 percent.  Capacity utilization also increased to 81.9 percent, a six year high.  Although this should keep the labor market supported for the time being, it is irrefutable that the outlook for the US economy is murkier.  The key will be how consumers respond to the weaker readings from the housing market.  With more than a month between now and the next Fed meeting, we have plenty of time to assess the health of the economy.  So far, one hint may be today's Redbook retail sales report, which fell for the second week in a row. 

Euro
The Euro is stronger despite mixed economic reports.  As warned yesterday, given rising oil prices and a higher Euro, the German ZEW survey had the potential of coming out much weaker than expected.  This is exactly what we saw this morning, as the survey of analyst sentiment dropped from 62.7 to 50.  This is the fourth consecutive drop in the report and the lowest since November.  The ZEW survey for the region as a whole also fell from 58.7 to 47.7.  The Euro did drop on the report, but recuperated its losses at the onset of US trading.  Meanwhile industrial production came in stronger than expected rising by 0.4 percent instead of falling 0.3 percent as the market was predicting for the month of March.  European Central bank officials continued to remain hawkish with ECB Liebscher saying that there is "no dispute" that further monetary policy tightening would be needed.  Inflation seems to be playing a key role in their decision, which makes tomorrow's CPI numbers extremely important.   Annualized headline CPI growth is expected to remain solidly above their 2 percent threshold and for the most part, the ECB seems to be placing greater emphasis on the headline figure rather than the core figure unlike the Fed.  The path that the ECB is heading on is clear and despite some weaker numbers and pressures from the Euro and oil prices, they have no intention of wavering from their plans to raise interest rates to at least 2.75 percent. 

British Pound
The British pound is stronger against the US dollar following firm inflation figures.  Coming out right in line with expectations, consumer prices rose 0.6 percent last month, three times faster than the pace of growth seen in March.  Core prices remained unchanged with the annualized pace of growth staying steady at 1.3 percent.  The busy UK economic calendar continues tomorrow with unemployment data due for release.  Improving conditions in the manufacturing sector is expected to lead to less jobless claims in April.  The month prior, 12.6k people filed for unemployment, only 7.3k is expected to have filed last month.  With the UK unemployment report, we always keep an eye on average earnings, a piece of data closely followed by the Bank of England.  Earnings growth is expected to rise which the central bank will see as a positive development.  Tomorrow we are also expecting the minutes from the monetary policy meeting held earlier this month.  Given the hawkishness of the Quarterly inflation report, the minutes will probably be sterling positive.  Market reaction could be limited though as other reports have already instilled bullishness in the currency pair and has left many expecting an interest rate hike later this year. 

Japanese Yen
There was no clear direction in the yen today as the currency sold off against some of the majors while rallying or remaining unchanged against others.  Fundamentals remain intact with the outlook more yen bullish than bearish.  Japanese consumer confidence rose from 48.2 to a more than expected 50.2 in the month of April.  This is the highest reading in 15 years and highlights how far the country has come over the past few years.  They are inching closer to finally removing their zero interest rate policy as the economy continues to gradually improve.  However, the rise in the yen has posed a big risk for the country's export sector, one that consumers may not have felt quite yet.  Japanese Finance Minister Tanigaki continues to express displeasure with the currency's move and hints at intervention while Bank of Japan Governor Fukui, though looking to raise interest rates, has yet to decide on timing.  Meanwhile, on the other end of the spectrum, China is moving forward slowly on their plans to allow for more flexibility in the currency.  According to a central bank official, more moves will depend upon how the economy performs in May or June. 

Kathy Lien is the Chief Currency Strategist at FXCM.