US Dollar
Reeling off of yesterday’s firmer inflation numbers, the US dollar continued to strengthen today. The dollar’s most meaningful gain was against the Yen as carry trade demand continued to drive the currency pair higher. The two pieces of US data released today were jobless claims and help wanted ads, both of which dropped less than expected. Last week’s 359k print and this week’s 332k print suggests that the labor market may not have been as healthy this month as it was back in January. We still have 2 weeks before the non-farm payrolls report, but the outlook for labor market is very dollar friendly at the moment. On what was otherwise a relatively quiet trading day, we saw a brief burst of dollar weakness as rumors circulated that the terror alert would be raised. The Department of Homeland Security clarified shortly thereafter that there was no imminent threat, but the damage was already done. Earlier news that Iran is expanding rather than freezing their nuclear program already made the markets jittery about potential geopolitical risks, but the impact on the dollar was limited. The follow up rumor about the terror alert came less than hour later and that was the straw that broke the camel’s back. Iran’s clear defiance suggests that the US could take a more aggressive measure by attacking Iran while the threat of attacks from the US could cause Iran to flex their muscles by causing terrorist attacks. Either of these scenarios could trigger a wave of dollar selling. There is no US data scheduled for release tomorrow but Fed Presidents Fisher and Yellen will both be speaking about the US economic outlook.

Euro
Despite a V shaped intraday reversal, the Euro still ended the session lower against the US dollar. Economic data was mixed. Fourth quarter German GDP was confirmed at 0.9 percent. The breakdown of the data indicates strength in exports but weakness in government and private consumption. French, Italian and Belgium business confidence were all stronger than expected, which suggests that we could see strength in tomorrow’s much awaited German IFO report. The Belgium business outlook survey tends to have a strong correlation with the German IFO report. Having hit a record high back in December, even if we see a small pullback in German business confidence it may not be entirely bearish for the Euro. However, there remains a risk of a sharper pullback on the potential drag from the Value Added Tax increase. Meanwhile in Switzerland the employment rate increased from 1.3 percent to 1.6 percent, which was slightly weaker than expected. The market was looking for employment to increase from 3.695 million to 3.7 million but it only rose to 3.699 million.

British Pound
The British pound is stronger across the board as the central bank injects more uncertainty about the outlook for monetary policy. Just after the market sent the currency tumbling on the back of less hawkish MPC minutes from the latest monetary policy meeting, Bank of England’s Chief Economist Bean reminded everyone that the central bank cannot afford to relax about inflationary pressures. Just as the sharp upward movement in inflation over the past year may have exaggerated the pick-up in underlying inflation, so the prospective fall back is likely to overstate the extent to which inflationary pressures have abated." He indicates that it is difficult to know where rates are headed next and there are just as many upside as downside risks. The Bank of England is a notoriously flexible central bank and depending upon how data fares, they have done 180 flips in the monetary policy to respond to that. Fourth quarter business investment was much stronger than expected, which has helped to drive demand for the British pound. We are expecting the second release of fourth quarter GDP tomorrow, no changes are predicted which should leave the market’s focus on the German IFO report.

Japanese Yen
Carry trade demand was so powerful today that it sent the Japanese Yen to a fresh all time low against the Euro. Economic data was mixed. The trade surplus for the month of January fell short of expectations but exports rose much stronger than expected thanks to the weak Yen. Although Chinese demand could falter in February due to the Lunar New Year, the continual weakness in the Yen this year should limit the fallback. We could also see a boost to consumer spending as Toyota plans to increase bonuses in the next fiscal year, which begins in April. Record sales have been driving Japanese labor unions to ask for more pay from automakers As wage negotiations reach agreements, we expect more announcements of this nature. Weak wage growth has been the primary concern for Japanese policymakers. Record profitability could finally help to drive more liberal spending.

Commodity Currencies (CAD, AUD, NZD)
After yesterday’s strong rally, it was not surprising to see the commodity currencies succumb to profit taking as both gold and oil prices stabilize. The biggest percentage loser of the three was the Australian dollar which came under pressure on the back of continually cautious comments from Treasurer Costello. Overnight he warned that the drought could trim three quarters of a percentage point from growth last year; Australian GDP is due on March 6th. New Zealand reported a smaller increase in credit card spending for the month January as well as a downward revision to the December data. The Canadian dollar had no reason to weaken today aside from profit taking. Crude prices continued to rise after the EIA reported the largest decline in heating oil and gasoline stockpiles since September 2005. No data is expected from any of the Commodity Bloc countries tomorrow, which means that their price action could once again be driven by the moves in the commodity market.

Kathy Lien is the Chief Currency Strategist at FXCM.