US Dollar
Consumer confidence rose to the highest level in almost five years as better employment prospects supported optimism in the world’s largest economy. The survey, released by the Conference Board, rose above the 110 print seen in the previous month to 110.3 in the month of January. However, the US dollar remained under pressure for the second consecutive session against the majors, barely even moving as if the report had never been released. Although surprising, the market reaction can be expected as we head into scheduled events for tomorrow. Not only are dollar traders focused on a continuation of 5.25 percent benchmark rates by the Federal Reserve, but also an unexpected and forecasted rise in gross domestic product. Expected to show an expansion of 3 percent, the upcoming GDP report is likely to be reflective of an economy that some had not expected in the quarter. Earlier in the year, experts and the market were anticipating further weakness, sub 2 percent growth, boosting the likelihood that policy makers would cut rates. What a difference three months can make. Now, with consumer spending higher and unemployment improving, inflationary pressures may well make their way back onto the table when policy makers finally release their decision. Additionally, a higher gross domestic product report for the fourth quarter would not only boost speculation of further stabilization in interest rates, but also help in reversing the expected dollar weakness for the first quarter of the new year. Subsequently, this would help support focus on the unemployment report set for week’s end with the consensus expecting a hefty 145,000 positions addition to the overall labor force. Ultimately, tomorrow will likely set the tone for dollar traders in the month to come should it handsomely beat expectations.

Euro
Euro bullishness trumped the actual releases on the day as economic reports were relatively negative for the underlying currency. First and foremost, the overall retail PMI survey dropped in the month, mainly blamed on the increased VAT tax. Already a concern, the VAT tax is being blamed in thinning out consumer spending for the region, subsequently driving the German CPI report lower on the month. Although still higher at 1.6 percent on the annualized figure, the monthly report on consumer prices in the German country declined by 0.2 percent in January. Utimately, in the current interest rate market frenzy, the report supports the continued stablility of the benchmark interest rate. Subsequently, previously expected to be hiked by another 25 basis points, the benchmark rate may now be left alone for yet another meeting as there remains a dearth of evidence to think otherwise. Attention will now be focused on tomorrow’s employment data for the zone’s largest economy as well as retail sales figure. Should the retail report end higher, which is currently expected, traders can be assured that speculation will run on the euro’s side as it reverses the aforementioned sentiment.

British Pound
Data was thin for the British pound, with the exception of housing sector data that was relatively softer than expected. According to the Nationwide building society, house prices rose at the slowest pace in eight months as higher borrowing costs may now be crimping demand for residential property. Prices rose 0.3 percent in the month of January, while rising 9.3 percent on the annualized comparison. The results are subsequently being coupled with earlier projections by the Halifax survey in December, which purport a potentially softer housing market currently underway. Taking this into consideration, the pound sterling was only able to make incremental gains against the dollar as speculation is now considering the likelihood that rates will no longer be hiked as the previous rate increases are likely to do their job against inflationary pressures that peaked at 3 percent.

Japanese Yen
At a glance, economic data was mixed on the day with industrial production higher, but consumer spending lower. However, it was the retail sales figures that led the Japanese Yen lower as sentiment seems bent on the one thing that the central bank wants to see. Although citing established inflationary pressures, the Bank of Japan noted that domestic demand remains weak in previous quarters. The likelihood that it will remain subpar is keeping policy makers from raising interest rates from the historically cheap valuations, adding fuel to the current carry trade favorite’s depreciation. Notably, however, a turn may be in the works following an increase in the frequency of statements regarding the upcoming G8 conference. Should the yen formidably be brought up, we may have a repeat of the massive bullishness back in 2003.

Commodity Currencies (CAD, AUD, NZD)
The commodity bloc was under pressure for the most part with the Canadian dollar being the sole gainer against the US dollar counter. Supportive of selling pressure in both the Australian and New Zealand dollars was news in the overnight that business confidence fell for the month. Printing a 4 figure, the survey released by the National Australia Bank (NAB), dipped two index points from the previous month’s 6. Hitting a 14-month low, the Australian survey was depressed as weaker retail and wholesale activity lent to a pessimistic attitude. The depressed expectations helped to additionally lower estimates of a near term rate hike by the Reserve Bank of Australia decision, set for next week bolstering bearish undertones in the Kiwi as well. Incidentally, both pairs remain negative heading into the New Zealand trade balance survey tonight as well as the release of new home sales for the Australian economy. Should the trade deficit narrow as expected, it may provide some reprieve from the four day blood bath. Separately, the Canadian dollar was well supported in the New York session as a crude oil bounce and higher inflationary pressures helped the USDCAD to move lower. A colder northeastern outlook helped to support crude oil prices which topped $56 a barrel on the NYMEX in New York. Coupled with industrial and raw material product prices that surged in the month, the increase in commodities helped to buoy the CAD past the 1.1850 figure to trade just above the 1.1800.

Kathy Lien is the Chief Currency Strategist at FXCM.