• Dollar Slides as US Data Exhibit Questionable Resilience
• Italy Faces Downgrade Risk from Fitch
• Yen Rallies on Expectation that CPI Will Come in Firmer

US Dollar
Today served as a great reminder to the market that the true pressures on the dollar are to the downside.  Right now we are at the tipping point for the greenback as economic data shifts from undeniable strength to questionable resilience.  Todayâ�,��"�s revision to first quarter GDP fell short of expectations, rising from 4.8 percent to 5.3 percent against a forecast for 5.8 percent growth.  Admittedly, this is the best number that we have seen since the third quarter of 2000, but the half point upward revision was primarily due to increased inventories which is not a positive buildup.  In addition, the shortfalls came in consumption and business investments which are certainly a cause for concern since consumer and business spending are holding up the economy.  The core price consumption expenditure remained unchanged which was mildly surprising but in line with Bernankeâ�,��"�s rather subdued comments in a letter to the Joint Economic Committee today that core inflation remains stable.  As for the housing market, once again, there is more than meets the eye.  Existing home sales were slightly better than expected in the month of April but the March figure was revised lower, offsetting the firmer figure.  In addition, the number of existing home sales was still 2 percent less than the previous month as inventories build up and the market continues to struggle to hold onto its strength.  By now it seems like it is only a matter of time until we see a more meaningful contraction in the market.  Next week we are expecting non-farm payrolls for the month of June and with the market not satisfied with last monthâ�,��"�s results, they are once again gunning for a strong number.  However jobless claims have been building up and with todayâ�,��"�s downtick in help wanted ads, we would not be surprised to see yet another disappointment.  Overall, any piece of positive US data seems to contain a weaker component and if we begin to see numbers that are just plain weak, then the arguments for the Federal Reserve to continue raising interest rates will fade as a result.  Rate hike expectations have already been falling modestly and the lack of anything significantly hawkish in Bernankeâ�,��"�s letter today certainly does not help. 

Euro
With nothing meaningful on the Eurozone economic calendar, the Euro is stronger today purely because of dollar weakness.  Italian business confidence rose slightly from 96.0 to 96.8 but the trade deficit increased from EUR 1.4 billion to EUR 1.79 billion while retail sales dropped a surprising 0.4 percent.   Although the recent political and structural problems have not dampened the optimism of businesses, it has certainly dampened the optimism of rating agency Fitch who put the country on a â�,��"ratings watch negative.â�,�  According to the Financial Times, they are worried about the deterioration in public finances and that Romano Prodi, the countryâ�,��"�s new Prime Ministerâ�,�˜s small majority win would hamper his efforts to get any restructuring plans passed.  If the country does not make any significant changes soon, they could face a ratings downgrade over the next five months from AA to AA- like Japan.  If this is the case, it could be negative for the Euro since many investment funds may be prohibited from investing in Italian bonds.  This is a bit far out of course which means that the market will probably forget about this possibility for a good few months and choose instead to focus on the more immediate developments in the Eurozone.  Tomorrow we are expecting German consumer prices.  Given the softer figures from the various districts, consumer price growth in Germany as a whole is expected to slow this month, which would reduce the already slim likelihood for the European Central Bank to raise interest rates by 50bp instead of 25bp. 

British Pound
The British pound is stronger today against the dollar but is still underperforming against the Euro.  Growth in the first quarter was confirmed at 0.6 percent, but private consumption was revised lower from 0.7 percent to 0.2 percent, the weakest level in a year.  With UK consumers holding back growth, the country will have to rely more heavily on export demand.  Overall, we are still on path to see firmer growth in the second quarter in the UK as economic data continues to improve.  The Bank of England will find comfort that investment and export growth is improving, giving them good reason to retain a neutral bias on interest rates.  The market still believes that they will raise rates later this year and if economic data continues on its trend, this could very well happen. 

Japanese Yen
The Japanese Yen is firmer as the market positions itself for a stronger CPI report tomorrow.  Even though the consensus forecast is for consumer price growth to slow this month and the IMF talked about how inflation is expected to remain very low, the rumor is nevertheless circulating in the market.  Japanese economic data was weaker than expected with the trade surplus dropping by a whopping 31.8 percent last month.  Imports surged 20 percent while exports rose by 11 percent. According to the Ministry of Finance, this is the third highest export value and the second highest import value ever. This is the sixteenth consecutive month that Japanâ�,��"�s trade surplus has been shrinking.  However, the rise in imports is certainly encouraging.  Even though a portion of that is probably attributed to the rising cost of oil, the strong yen should moderate some of the impact indicating that consumer demand in Japan may really be rising, which is something that the Bank of Japan should be quite happy about.

Kathy Lien is the Chief Currency Strategist at FXCM.