• Dollar Eases On Fed Chatter, Weak Leading Indicators
• Sterling Discounts Poor Retail Sales
• Yen Prepares For BoJ Policy Announcement

US Dollar
The dollar advance yesterday triggered by core inflation data couldn't hold back the resolute bears in today's session as mixed indicators and Fed chatter left the currency to the overriding bearishness held for the past three months. The newswires lit up early in the New York session with a sizable increase in initial jobless claims to 367,000 due to the temporary government shutdown in Puerto Rico.  A few hours later, the Conference Board's leading indicator's index produced a sizable dollar sell off when the economic sentiment gauge contracted 0.1 versus expectations of a slight rise.  Six of the 10 components comprising the index declined with notable drops in building permits and consumer confidence, suggesting the Fed's aggressive tightening policy is producing its desired effects in cooling aggressive consumer spending.  This was very different from what Richmond Fed President Jeffrey Lacker was suggesting of inflationary pressures however in an address to the media.  In regards to yesterday's CPI read and a first quarter of annualized price growth that ran at a 16 year high, 5.1% pace, Lacker said inflationary pressures were 'borderline' and 'containing inflation has to be the primary focus' for policy makers.  Lacker delivered these comments just before the Philly Fed revealed that manufacturing in the region accelerated faster than expected to produce a 14.4 read in May following Aprils 13.2 figure.  This increase came despite a doubling in the prices gauge to a seven-month high due to higher costs of energy and other key commodities.   Even the Fed Chief Ben Bernanke got his two cents in.  At a Chicago Fed conference on banking regulation, Bernanke said that the housing market is cooling at a 'moderate' tempo that should produce a soft landing.  As the housing market tempers, officials believe consumer spending will follow; which would justify the Fed's aggressive two year policy and a shift to a neutral position. Dollar-side activity should be reserved tomorrow with the only indicator of significance, the Richmond Fed manufacturing index, drawing little attention.

Euro
A thin calendar kept euro action reserved Thursday with Italy's trade balance the only indicator of relevance for the currency markets.  According to the government release, the familiar trade deficit contracted to its lowest level in three months to 1.94 billion euros.  Real euro positioning will be procured tomorrow with German and French indicators bringing volatility back into the pair.  German producer prices are expected to have accelerated in April by 0.7% after record high energy and commodity prices pushed up firm's bills.  This inflationary assist will add to the consumer price gauge that expanded 0.4% over the same month and nudging the annualized figure to the ECB's target 2 percent.  Elsewhere, France will release its preliminary first quarter GDP figures.  Expectations are running high for the output indicator, with the market consensus of the quarterly measure hovering around 0.6 percent that puts the longer, annual estimate up to 1.8 percent. This would be the quickest pace of economic expansion in Europe's third largest economy since the final three months of 2004.  

British Pound
Action in the sterling, like the euro, was reserved with only a retail sales figure offered up for market digestion.  Retail sales for the month of April grew a greater than expected 0.6 percent, but fell well short of the revised 0.9 percent rise in March.  Component sales data showed within the non-food sector, sales at household and electronic goods stores advanced 3.3 percent and department stores achieved a 1.4 percent rise.  This was the third consecutive month of increasing sales suggesting consumer spending in the economy will help prop up growth for the current year.  Last year, the economy grew at a 1.8 percent clip, the slowest pace in 13 years as spending in the government and consumer sectors slowed.  April's retail figures could be evidence to the MPC and currency traders that the UK consumer will help to pull the nation's economy out of its slump.  Rousing the funds and confidence for consumers to boost spending last month was a combination of wage gains and a 2 percent surge in the HBOS housing price indicator, a two year high.   The housing market has steadily improved since the Bank of England decided to cut the overnight repot rate a quarter percent.  Now the central bank is expecting consumer spending to contribute to economic expansion of around 2.6 percent for the current year while predictions for the consumer price gauge are breeching the 2 percent target for the same period.  This mixture of healthy growth and inflation is presumably the scenario MPC member David Walton foresaw when he cast the sole vote for a rate hike last week at the BoE's policy meeting.  

Japanese Yen
As expected, the yen gained little ground today in trading as the market pushed aside poor nationwide and Tokyo department store sales figures in favor of speculating on tomorrow's first quarter economic growth figure and Bank of Japan monetary policy announcement.  Nationwide department store sales last month dropped 0.6 percent, marking the first decline in 3 month.  Sales in the nations capital fell 0.5 percent.  This was an ominous indicator as it is one of the last pieces of data BoJ officials will see before their policy announcement.  The more significant indicator for analysis however will be tomorrow's GDP number.  Economic output in the world's second largest economy is expected to slow to 1.1 percent, nearly a fifth of the previous quarter's pace.  This may create some reservation from the cautious policy makers who have so far classified the economy as 'recovering.'  Nonetheless, many economists expect the policy body to upgrade the nation to 'recovering' and continue preparing financial systems and investors for the inevitable interest rate hike off of zero percent.

Kathy Lien is the Chief Currency Strategist at FXCM.