Dollar Denies Doom
Only a week after a very disappointing NFP, dollar bulls were back with a vengeance as the unit gained across the board. In last weekâ�,��"�s commentary we noted that â�,��"The only major positive for dollar bulls is the fact that positioning is in their favor as EUR longs reached records highs on IMM.â�,�  And euro longs were indeed caught flatfooted as the greenback scored the trifecta of positive news. First Bernanke and Co. came out of the gate with ultra hawkish rhetoric  signaling that 5.25% was done deal. Next the surprising death of al-Zarqawi, Al Qaedaâ�,��"�s top man inIraq, provided an unexpected boost to dollar bulls. And finally, the much anticipated press conference by Jean Paul Trichet turned into a rout for euro longs as the ECB President refused to unambiguously endorse rate hikes by the Central Bank. On Friday, the slightly narrower than expected Trade Balance temporarily pushed the pair below the 1.2600 figure fully 370 off its recent highs, but by midday Central Bank bargain hunting finally stabilized the decline.

Next week the US calendar shows nothing but red in the expectation column and unless the market sees some unexpected strength from Advanced Retail Sales or significantly higher CPI, - a distinct possibility, given the fact that rental costs have been inching up and comprise more than 30% of the index - the greenback counter trend rally will have a hard time moving past 1.2500 off these lackluster fundamentals.

Euro Bust
50 basis points or bust was how we handicapped the market last week and of course the answer for euro bulls was bust. ECB chose to hike rates by only 25 basis point and furthermore Mr. Trichet remained firmly uncommitted on the question of future rate hikes. On Friday we wrote, â�,��"Much to the chagrin of euro longs,  ECB President Jean Paul Trichet masterfully orchestrated a lowering of the EUR/USD  exchange rate by essentially promising nothing â�,�˜ex-anteâ�,��"� to the markets leading many speculators to doubt ECBâ�,��"�s commitment to further rate hikes.  We, however, believe the European monetary officials have lost none of their hawkish resolve,  and having  guided the EUR/USD to well below the 1.3000 level will now be free to exercise proper monetary restraint without the interference of EZ fiscal officials concerned about the threat to export growth.â�,�

This week the data from the Euro-zone is far more subdued and offers players far less opportunity for volatility. On Tuesday the ZEW survey may have some short term impact and Thursdayâ�,��"�s CPI numbers could also move the pair, but overall next weekâ�,��"�s trade in the EUR/USD is far more likely to be dictated by the dollar component of the pair.  If US news turns negative yet again the retrace in the EUR/USD rally could well be over.

Notching Up Sector Points
Green results on the fundamental front couldnâ�,��"�t salvage the Japanese yenâ�,��"�s drop last week.  As the dollar rallied, there was little the unit could do against such overwhelming strength, except to hold on.  The unit dropped 190 points before stabilizing off Wednesdayâ�,��"�s news that May machine tool orders which surged 14.8% overall with an impressive 24.0% contribution in demand from foreign sources.  With demand obviously in place, the report suggested continued strength in the all-important manufacturing sector, especially given the positive showing of April machine orders release on Friday which  blew out expectations of 3.5% by printing a 10.8% gain. With such strong manufacturing numbers in tow many analysts now forecast that business will boost production and in turn intensify inflation. 

This week traders will see if the data outside the manufacturing sector will continue to confirm the expansion scenario further fueling expectations of a near term rate hike. On Monday all eyes will be on the GDP as well as the all important CGPI figures which have shown positive inflation for the past 12 months.  On Tuesday, Consumer Confidence numbers should print above the 50 boom/bust level and on Thursday the Tertiary Industry Index measure of the service sector is expected to recover from last monthâ�,��"�s decline.

In short, the question with the yen vis a vis the lifting of the ZIRP is not if but when.  As Japanese data continues to shrug off the last vestiges of deflation monetary authorities will have no choice but to raise rates sooner rather than later, and that in turn will bode well for yen bulls.

Breakdown At 1.8500
The pound dropped the most amongst the majors giving up 225 basis points to the greenback. Three steady weekâ�,��"�s of decline and the currency has finally dipped below the 1.8500 figure. Although, the most recent economic data wasnâ�,��"�t horrid the combination of further weakness in Manufacturing and the likelihood of static monetary policy left little desire for cable amongst traders. The worst reads of the week came from the factory sector. Industrial and manufacturing production cut its positive run short in April, dropping -0.6% as energy prices cut demand. The trade deficit, though growing in headline reads, actually reached a year low.  Meanwhile, MPC kept rates on hold leaving no commentary on it s decision. Interestingly, futures markets have shown that investors have already priced in a 25 basis point hike into the contract for September expiry.  However, with eco data muted at best a rate hike by fall remains an open question. In fact if the news does not improve the BoE may be forced to consider another rate cut.

Next weekâ�,��"�s starts off with inflation data with both PPI and CPI expected to recede from last monthâ�,��"� s high readings as the influence of oil costs is somewhat dampened. More important will be the end of the week data including claimant employment data, retail sales and the RICS balance.  The real clue to UK economic strength will be found amongst those releases.

Swisse Holds Its Own
In a week dominated by dollar strength, the Swissie held its own â�,�“ losing the least against the greenback amongst all the majors. On the economic front the calendar was practically empty with only the Unemployment rate reported. As has been typical of Swiss releases, the news was better than expected with the rate declining to a miniscule 3.3%. The Swiss economy continues to  operate on all cylinders and the market is begging to appreciate the growth story. Even is a week of al-Zarqawiâ�,��"�s death â�,�“ a seemingly Swissie bearish event as geo-political risks recede, the franc maintained its strength as the unit is now trading as growth story rather than its traditional place as a safe haven currency.

Next week, the SNB rate decision will be the marquee event of the week. The market expects a 25 basis pint hike to 1.75% but more interestingly will be the commentary from the SNB itself especially in view of the fact that the ECB press conference was decidedly non-committal. Given the careful nature of SNB President Jean Pierre Roth the possibility of any surprise is minimal. Still, if Mr. Roth  stresses inflation risks, the Swisse could continue to rally against the euro with the market assigning the higher probability of a rate hike to the SNB.

Boris Schlossberg is a Senior Currency Strategist at FXCM.