US Dollar
In the past few years, determining the theme in the currency markets was simple – the prevailing sentiment was either pro dollar or anti dollar. If the dollar sold off, it would do so against every major currency and if it rallied, dollar strength would also be universal. In the past month however, pro dollar or anti dollar sentiment would only be reflected in USD/JPY and USD/CHF. For the other currencies, their performance against the dollar would be based upon which country had the more promising interest rate prospects. Today was no different as the new market dynamics continued to drive market activity. Even though fourth quarter GDP and core PCE were revised higher, the US dollar sold off against the Euro, British Pound, Australian, New Zealand and Canadian dollars. The only currencies that it managed to strengthen against were the Japanese Yen and the Swiss Franc. Although it can be argued that the reaction to the US data suggests that traders may not believe that the improvement in US growth will continue, this is not really the reason why dollar strength was only limited to the Yen. Admittedly, GDP is backward looking and recent reports on consumer spending, consumer confidence, the housing market and durable goods indicate that the economy is still very vulnerable. However the real explanation for the movements is oil. Oil prices have increased once again to settle above $65 a barrel. The more than 15 percent rise in crude prices has forced the US Federal Reserve to keep interest rates at 5.25 percent and warn that inflation risks will prevent them from cutting interest rates anytime soon. However the rise in oil prices also has the same impact on inflationary pressures in the Eurozone and other countries like Canada, Australia, and New Zealand. Unlike the US, their economic growth is not faltering as much as the US. They do not have the same problems in their housing markets and for the most part, aside from the Eurozone, the labor markets for these countries are very tight. This means that while the Federal Reserve’s only choice is to cut rates or not, the options that these central banks have are either to keep their rates unchanged or to raise them. This discrepancy has led to the underperformance of the US dollar against everything except for the Japanese Yen and Swiss Franc. This dynamic will only change if oil prices reverse course. In the meantime, we are expecting personal income, personal spending, Chicago PMI and construction spending tomorrow. The previous disappointments in the Philadelphia Fed and Empire State manufacturing surveys will limit the impact of Chicago PMI while spending and income could be hurt by the recent slowdown in the housing market and the sharp drop in the stock prices last month.

Euro
Stronger data all around has helped to rally the Euro. Improvements were seen in both the French and German labor markets. German unemployment dropped by a much larger than expected 65k in the month of March, bringing the unemployment rate down from 9.3 percent to 9.2 percent while the French unemployment rate fell from 7.4 percent to 6.9 percent. Retail sales in the region as a whole were also very strong as retail PMI expanded once again. The index rose from 49.8 to 53.4 thanks to improvements in both Germany and France. The combination of higher inflationary pressures and stronger economic data paves the way for a further rate hike by the central bank. Another batch of Eurozone data is due for release tomorrow including German retail sales, French consumer confidence, French Producer prices, Eurozone consumer confidence and Eurozone unemployment. Once again, improvements are expected all around, which should continue to support the Euro.

British Pound
A flurry of activity in the UK failed to lead to any meaningful price action in the British pound. Overall, the data released this morning was mostly positive for the pound with both mortgage lending and approvals beating consensus. The strength of data suggests that the previous three BOE rate hikes are having little effect on the housing sector as demand continues to rise. The results further indicate that, central bankers could still raise interest rates again this year. Adding to the hawkish bias was the distributive trade survey for the month of March. UK retailer sales volume skyrocketed to the highest balance since December 2004. This indicates that consumer spending growth is robust, which is likely to feed into higher inflationary levels.

Japanese Yen
Yesterday we had said that when it comes consumer spending, we often see more disappointments than upside surprises. Unfortunately that was exactly what happened in the month of February. Retail sales dropped by 0.9 percent, which was far larger than 0.5 percent drop that was initially expected. Most of the decline came from autos and gasoline sales which does provide an ounce of encouragement, but last night’s data only further validates the Bank of Japan’s hesitancy to raise rates again. This has helped to keep carry trades in play as the Yen became the day’s worst performing currency pair.

Commodity Currencies (CAD, AUD, NZD)
The high-yielding New Zealand dollar stayed afloat today with the help of economic data that raised the prospects of additional monetary policy tightening by the Reserve Bank of New Zealand. The Current Account balance for the fourth quarter hit -3.929B, an improvement from the third quarter balance of -4.667B. Along with the jump in M3 Money Supply to 14.0 percent from 12.5 percent, this signals that the RBNZ could be forced to raise rates in April in order to cool surging domestic demand and the massive expansion of credit. Meanwhile, the Canadian dollar gave up some of this morning's gains following Bank of Canada Governor David Dodge's press conference. In his commentary, Mr. Dodge said the market should not put too much focus on a single CPI number, referring to last month's jump of 2.4 percent rise in the core reading which subsequently sent the USDCAD pair reeling. Nevertheless, Loonie's losses were capped on Mr. Dodge's observation that domestic demand "seems a little stronger.” After rallying this morning to test heavy resistance at .8100, the Australian dollar ended today just slightly above yesterday's New York close.

Kathy Lien is the Chief Currency Strategist at FXCM.