• Inflation Surprises, Dollar Finds Its Footing
• BoE Minutes Show a New Contrarian
• Japanese Yen Quiet Before the Store

US Dollar
As we said yesterday, the dollar's direction in today's session would be contingent on core consumer inflation data.  While the headline figure edged higher than expectations with 0.6 percent growth over April, the annual measure met expectations with a rise to a 3.6 percent clip.  Making no small contribution to the overall reads were the sudden and exaggerated advances in energy products like unleaded gas whose price grew nearly 9 percent over the period.  However the Fed has long since tempered its opinion of the volatile class of consumer goods and turned to the core read that strips the inflationary gauge of volatile energy and food goods, and this is were the currency market took heed.  Against expectations for the monthly figure to abate slightly in April to 0.2 percent, traders and economists were surprised with a repeat 0.3 percent print.  Putting this into better perspective, the year-over-year measure advanced from a 2.1 percent rate to 2.3 percent - well beyond the central banks 2 percent comfort level.  This will give FOMC members more to consider come the June meeting, though an additional 25 basis point hike is far from assured.  Given yesterday's subdued core producer price gauge and the fact that annual wages continue to outpace the growth in headline consumer inflation over the past year, it is still within the Federal Reserves means to consider a halt to its thus far, uninterrupted 16 session hawkish stance.  Until that happens though, currency traders will look for any further fundamental reason to abandon their recent overwhelming bearishness. With little in the way of market moving releases until next Thursday's first revision of GDP, there could be a reversion to dollar selling without influence from outside the economic calendar.

Euro
The sole piece of market worthy Euro data that was released for today's session, that of April inflation, seemed to fall on deaf ears despite its relevance for monetary policy for the European Central Bank in the months to come.  Inflation in the group of economies accelerated a faster than expected 0.7 percent month-over-month, while the annual gauge met the market's expectation of a 2.4 percent pace.  While the monthly change was the largest in over six years, the market's attention was thrown to the annualized headline figure as it moved further away from the central bank's 2-percent target.  The implications of this indicator on the probabilities of future policy shifts were clear.  Expectations of a rate hike from the ECB policy group at the June 8th meeting have long taken the majority in futures trading.  Elsewhere in European financial markets, the region's equity indices marked their biggest decline in three years as inflationary fears in Europe and the US produced expectations of rate hikes in the globes largest economies that would sabotage plans for business investment that has resulted from booming firm profits.  The French CAC 40 Index plunged 3.18 percent while the German DSX Index dove 3.4 percent. 

British Pound
While the bulk of the UK's economic data was negative, a spark of bullishness was found with the release of the minutes from the Bank of England's May 3-4 meeting.  The most remarkable event in the text was the split in officials who wanted to change the rate and those that wanted to keep it in unchanged.  In his final meeting, member Stephen Nickell cast his vote for a reduction, a stance he has held since the December meeting.  However, leaving the usual pack of neutrals was David Walton who voted for a rate hike. The minutes said of Walton, "one member felt that the balance of risks to inflation relative to the 2 percent target had shifted a little too much to the upside."   After the release, it seemed investors' expectations of a rate reduction in the near future went out the door with Nickell; and with Walton the new contrarian; more bets have been place on a rise from the MPC.  The rest of the data for the session was a bitter read.  Employment figures showed the number of jobless continued to grow in April as manufacturers sacked workers in an effort to withstand higher costs and sapped domestic demand.  Jobless claims rose 7,700 to the highest level in nearly three years, while the claimant count rate held at 3.3 percent. A month back, the International Labor Organization's measure of the percentage of jobless in March rose from 5.1 to 5.2 percent.  The final nail in the economic coffin was the reduced pace of quarterly income growth in average earnings and manufacturing wages for March to 3.8 and 1.9 percent respectively.

Japanese Yen
The Yen was left at the mercy of the crosses today as traders sidelined the currency, deciding to ignore today's releases in anticipation of the coming days' GDP and department store sales data as well as a BoJ policy announcement.  Economic data released in the overnight Tokyo session generated little enthusiasm for the world's second largest economy.  The final revision of March industrial production was the biggest indicator for the day.  As expected, the monthly and annualized reads posted figures that were unchanged from their respective preliminary reads.  Instead of taking positions on this drab data, market participants are awaiting the fundamental rush in Thursday's and Friday's sessions. Expected for tomorrow are April's nationwide and Tokyo department store sales.  Often a good leading indicator of household spending, the figures will be interpreted for possible implications to whether consumer spending is adding to inflationary pressure at a pace quick enough to justify a rate hike from the usually mum BoJ.  This may receive little attention however from currency traders as the following day will bring a first quarter economic output number that is expected to plunge from the previous three months and a policy announcement that could illuminate the central bank's thoughts on when a rate hike would be necessary.

Kathy Lien is the Chief Currency Strategist at FXCM.