US Dollar
The greenback gained on the Euro, Yen and Canadian dollar but dropped against the British pound on hawkish undertones in the UK. Nonetheless, dollar strength was present and widely countered the results according to the NAHB housing market index. According to the survey, sentiment fell in the month of March, lower than expected, as subprime concerns permeated the sector. Homebuilders, once running high on continuous demand for new residential houses, were struggling to recover from the decline in overall sales. Even worse, speculation continues that further lending will be crimped on a rising number of subprime defaults, leaving a drag on the overall sector. For the record, the NAHB Wells Fargo sentiment index dipped to 36 from a previous 39. Continued declines through 50 reflect respondents remain negative on overall conditions. Incidentally, the lower than expected results, combined with recent commentary involving words like ‘recession’ and ‘subprime spillover’ are beginning to put pressure on near term Federal Reserve expectations. Although policy makers are not likely to shift their risk assessment in this week’s decision, the market is now beginning to price in a rate cut by the end of the year. Extreme forecasts are pitting 2 rate cuts by December with futures and options contracts pricing in a whopping 3 rate decisions to the downside. One thing seems to be in common, however, and that is the general consensus is estimating one 25 basis point rate cut before the end of the third quarter. The increase in speculation will support rising scrutiny over this week’s post-decision rhetoric, ultimately dictating the dollar’s near term future.

Euro
The Euro lost on the day even as elements were relatively bullish for the currency spot. Released during the session, Swiss industrial production for the fourth quarter rose to its highest level in six years. Even more impressive were the year on year comparisons, which rose to the highest level in six and a half years. Boosted by electrical equipment and watch production, the economy continues to be supported by strong foreign exports. However, price action dictated another story, as investors reinitiated carry trade speculation, denying the fact that the IP report was even released, Swiss bearish. Euro comments helped to spark a slight decline in the underlying spot as creditability questions overwhelmed policy maker hawkishness. Although European Central Bank Council member Klaus Liebsher reinforced that the ECB will do “everything necessary to keep inflationary pressures” in check, the euro was forced slightly lower as French Interior Minister Sarkozy questioned the region’s central bank. Targeting ECB Vice President Lucas Papdemos, Sarkozy criticized officials making light of the fact that the bank’s single focus on inflationary pressures has crimped overall growth and increased the euro strength in the markets. Sarkozy also noted the excessive deficit of Papademos’ country of Greece, undermining the VP’s creditability. Once stated as 3 percent, the nation’s deficit was found to be in the 6 percent range as updated numbers and recent deficits pushed Greece’s deficit requirement over the Euro zone limit. As always, internal turmoil and the accusations killed the market buzz, back from the St. Patty’s day weekend, leading the Euro slightly lower.

British Pound
Pound sterling maintained its bid tone throughout the day as housing prices continued to firm. Rising by 1.5 percent on the month, and 12.2 percent on the annualized comparison, the latest housing survey assures that the central bank will have to entertain another round of rate hikes in the near term. Incidentally, the day’s data purports a picture of consumer resilience as three previous rate hikes have failed to cool any type of consumption in the housing sector. The results are being coupled with supported retail sales figures and will play a bigger role in tomorrow’s consumer prices report. Ahead of the Bank of England meeting minutes, the consumer prices report is expected to remain relatively high at 2.7 percent. Still shy of the 2.9 percent surge in the previous month, the figure continues to suggest stronger than expected inflation, countering previous forecasts by policy makers of a slowdown. Futures contracts are in line with the notion as implieds continue to price in a likely rise in as early as March.

Japanese Yen
A rebound in global equity markets turned the tide for the Japanese Yen, as the currency weakened against the US dollar, testing 117.75 before settling closer to the 117.50 level. Economic data out of Japan provided little trading bias as Tokyo Department Store Sales weakened slightly while Nationwide Department Store Sales bounced to 1.7 percent from a flat reading during the month prior. Yen trade will likely remain relatively quiet ahead of the Bank of Japan's monetary policy decision. Although rates are widely expected to be held steady, markets will be keen to gauge commentary for the central bank's bias and potential timing for policy tightening in the future, especially as consumer price growth remains tepid and worries persist that deflation has not truly come to an end.

Commodity Dollar (AUD,NZD,CAD)
Markets had an appetite for the carry trade today as the Australian dollar surged to test the psychologically and technically important .8000 level while the New Zealand dollar rebounded above .7000, despite the complete lack of economic data for both countries. The Canadian calendar was sparse as well with only second tier data on tap. Wholesales sales for January fell back after posting stellar gains in the month prior, boding particularly ill for retail sales due out on Wednesday. However, the release of consumer prices on Tuesday may give Loonie a boost as the headline release is estimated to tick higher, subsequently sparking speculation amongst Canadian dollar bulls as the market pays heed to technical resistance just above the current price. The notion would also fuel some support for more stable benchmark interest rates in the long term, countering already priced in cuts towards the end of the year as Bank of Canada Governor David Dodge continues to forecast slower growth.

Kathy Lien is the Chief Currency Strategist at FXCM.