US Dollar
On Valentines Day, the Senate Banking Committee showed their love for Fed Chairman Ben Bernanke by applauding him for doing a good job of managing the US economy. This is a welcome shift from the attack and criticism that former Fed Chairman Alan Greenspan usually receives when he sits in the same chair. However even though the Senate was light on Bernanke, he was not as light on the US dollar. Traders were looking for the Fed Chairman to signal that another rate hike is needed in the near future but instead, Bernanke took a more moderate stance on inflation and warned that the housing market remains a drag on growth. These comments sent the US dollar tumbling and the move triggered a long awaited break in the EUR/USD. For the past month, the EUR/USD has remained trapped between 1.2865 and 1.3065; today’s break took the currency pair to a high of 1.3151 before retracing. To clarify, Bernanke was not pessimistic about the outlook for the economy. In fact, he believes that consumer spending will continue to grow solidly and that even though inflation pressure could diminish the risks are still tilted to the upside. The main takeaway message from Bernanke is the same message that he left us with at the FOMC meeting in January, which is that they need to see more data before deciding what to do next with interest rates. The next monetary policy announcement is not until March 21st. There will a great deal of new information on how well the economy and the housing market are doing between now and then so if the economy does improve, a rate hike in March is not out of the question. Bernanke specifically said that he wants to see how well new and existing home sales fare in the spring before drawing any conclusions. On other topics, Bernanke sided with Treasury Secretary Paulson on Japan by saying that they are not manipulating their currency. He is not worried about dollar diversification and noted that fourth quarter GDP will most likely be revised downwards. Meanwhile this morning’s retail sales and business inventories were non-events. Retail sales growth was flat in the month of January, which was weaker than expected. Excluding autos however, sales increased by a more than expected 0.3 percent. Retail sales for December was revised higher which indicate that the trend is still up. Business inventories were unchanged in December, which was right in line with expectations. November’s numbers were revised down from 0.4 percent to 0.2 percent. Bernanke’s testimony has set a moderately dollar bearish tone but the excitement has not ended. We are still expecting the Empire State survey, the Treasury’s report on Net Foreign Purchases of US securities, industrial production, Philly Fed and the NAHB housing market index tomorrow. Bernanke will also be testifying once again to the House Committee where he will undergo another round of questioning.

Euro
The Euro continued to strengthen against the US dollar and it is doing so for a very simple reason. The European Central Bank has been crystal clear about their plans to raise interest rates again in March while the Federal Reserve is showing hesitation. Eurozone economic data has also printed strongly while US data has been mixed. This morning the French business sentiment report came out stronger than expected with the index rising from 104 to 107. Evidence such as this validates the unanimously hawkish comments that we have been hearing from ECB officials. Liebscher was the latest to comment on the outlook for monetary policy. He stressed the upside risks to Eurozone inflation from wage growth, oil prices, indirect tax hikes and strong growth. We expect the ECB monthly bulletin to contain a similar message on growth and inflation.

British Pound
The main message in the Bank of England’s Quarterly Inflation report is the same message that we have been hearing from central banks around the world, which is that inflation will drop in the near term but there are still risks for a rebound later on. The report indicated that inflation could fall below the central bank’s 2 percent target by the end of the year, but there are a lot of things such as wages and oil prices that could still drive inflationary pressures higher once again. BoE Governor King warned of the same when he said that the market should not place too much weight on just one month of wage data. Today’s unemployment report revealed that average hourly earnings dropped from 4.1 percent to 4.0 percent in the month of January while the manufacturing unit wage cost fell by 0.2 percent. The number of unemployed claimants actually improved with 13.5k less people filing claims. This brought the claimant count rate from 3.0 percent to 2.9 percent. The labor market in the UK remains healthy which means that the Bank of England could still lift interest rates.

Japanese Yen
The Japanese Yen is weaker against every currency except for the US dollar following mixed data from Japan. The current account surplus deteriorated in the month of December for the first time in 6 months despite the recent weakness in the Yen. Industrial production on the other hand rose stronger than expected. The main focus for Yen traders is tonight’s GDP report. The market is expecting a very firm number, with growth rising 0.9 percent in Q4. However the deterioration in the trade picture suggests potential weakness. Either way, Japanese GDP should be a market mover tonight given the BoJ’s non-committal stance on rate hikes.

Commodity Currencies (CAD, AUD, NZD)
The commodity currencies are once again stronger across the board. Gold prices are higher but oil prices are lower. New Zealand reported robust retail sales for the month of December. This should pave the way for another rate hike by the Reserve Bank of New Zealand. Retail trade volume increased by 1.8 percent, which is the strongest performance in over 2 years. Food prices also rebounded by 1.4 percent in the month of January after dropping 0.5 percent last month. As for Australia, the Westpac consumer confidence reading was 1.7 percent in February. House prices are due for release tonight and positive but softer growth is expected for the fourth quarter. Canada only has manufacturing shipments due. Softer but positive growth is expected in shipments as well.

Kathy Lien is the Chief Currency Strategist at FXCM.