US Dollar
Strong data hasn’t helped the US dollar and today, weak data has actually hurt it. Headline consumer prices accelerated in the month of March, but core prices grew less than expected. The one tenth of a percentage point disappointment was enough for bears to pounce on the dollar once again. Combine that with the drop in industrial production in the month of March and it is hardly surprising that the US dollar reversed all of yesterday’s gains against the Japanese Yen and extended its losses against the Euro, British pound, Australian, New Zealand and Canadian dollars. Furthermore the market completely shrugged off the stronger housing market data and the continued rally in the Dow Jones Industrial Average, which exceeded its all-time closing high. In the past, USD/JPY and the Dow have moved in lockstep with the currency pair often acting as a leading indicator for the movements in the stock market. Therefore today’s exhaustion in nearly all of the Yen pairs including USD/JPY could actually be signaling a potential exhaustion in the Dow. Meanwhile with no more significant US data due on the calendar this week, there is nothing standing in the way of further losses. Whether this happens or not will be dependent upon how much momentum there is left in the Euro and British pound rally and whether carry trades are just pausing today or preparing for a turn. The US dollar and the health of the US economy are secondary at the moment as the stance of the Federal Reserve is crystal clear. They have zero flexibility to raise rates to combat inflation or to lower rates to spur growth. For the time being, we have no reason to believe that the demand for carry trades has hit their peak, but tonight we have New Zealand consumer prices which could be the key to determining whether these trades continue. As one of the most sought after currencies in the latest carry trade wave, the consumer price release will either confirm or deny the Reserve Bank of New Zealand’s need to raise interest rates.

Euro
Each piece of stronger Eurozone data only validates the European Central Bank’s need to continue raising interest rates. This morning, the German ZEW survey climbed from 5.8 to 16.5 in the month of March while the trade deficit narrowed from -7.0B to -1.7B in February. Both of these numbers were sharply better than expected, helping to send the EUR/USD 50 pips closer to its all time record high. According to the head of the ZEW, even though investors expect the Euro to continue to rise and for interest rates to be increased, the current level of rates is still accommodative and will not take a toll on growth. He actually even went one step further by saying that interest rates would need to be above 4 percent before it starts having a drag on growth. Recent comments by members of the European Central Bank suggest that they may be feeling the same way. With the GBP/USD clearing psychologically significant levels, the EUR/USD may be tempted to do the same. The currency pair’s inability to close above yesterday’s 1.3578 high is a bit worrisome, so we would definitely need to see a break above that level tomorrow before we target the 1.3667 2004 high. There is no significant data on the calendar tomorrow aside from a speech by ECB member Mersch. Meanwhile, Switzerland reported stronger than expected retail sales in the month of February. This surprise has helped to put a dent into the recent rallies of EUR/CHF and CHF/JPY. The Swiss National Bank reiterated their hawkish bias yesterday morning and today’s today confirms that the economy is strong enough to warrant a rate hike.

British Pound
The British pound is trading at 15 year highs and the burning question on everyone's mind is "How Much Further Can it Rise?" To answer this question, see our Special Report. The last time the currency was trading at this level against the US dollar was right before the country’s withdrawal from the Exchange Rate Mechanism (ERM) and things were much different then than they are now. The UK economy is now on a far stronger footing with a low risk of a major reversal. With the minutes from the Bank of England monetary policy meeting still due for release along with employment and retail sales data, there are sufficient fundamental catalyst to fuel further gains. The market needs validation that there was a more hawkish voting record at the last monetary policy meeting to confirm that the next move will come in May. If the votes remain at 8-1 with the one dissenter (Blanchflower) still favoring a rate cut, expect to see the GBP/USD slip back below 2.0 like a falling knife because this will signal hesitancy within the policy committee. Any sign of weakness as the currency pair attempts to develop a solid footing above that key level could trigger a wave of profit taking. Therefore we need to first see evidence that the labor market remains strong and consumer spending steady before the GBP/USD can take aim at its 26 year highs of 2.4460.

Japanese Yen
The Yen crosses are finally showing signs of weakness, but it may still be far too early to call a top. Bank of Japan Governor Fukui was on the wires last night, but he failed to commit to anything and simply noted that interest rates are very accommodative at the moment and warned that they are still looking to raise interest rates. The only piece of Japanese data released last night was consumer confidence, which dropped from 48.6 to 47.2. The economy is still struggling at a time when signs of inflation remain minimal. Leading indicators are due for release tonight and we doubt that this will have much of an impact on the Yen. Instead, flows and sentiment will be the key. If for some reason, carry traders find a reason to take profits at current levels, a short term or long term turn could be sharp.

Commodity Dollars (AUD, NZD, CAD)
The Australian, New Zealand and Canadian dollars continued to perform strongly against the US dollar despite the fact that oil and gold prices are lower. Australian business confidence was exceptionally strong in the first quarter, rising from 4.0 to 10. This indicates that the economy is doing well, which supports the central bank’s need to raise interest rates. New Zealand is expecting consumer prices tonight. This will be key to not only whether the Kiwi continues to rally, but potentially also whether carry trades will continue to extend. Canada has net foreign purchases of Canadian securities data due for release tomorrow. This is not likely to impact the CAD as Thursday’s consumer price data is the more important release this week.

Kathy Lien is the Chief Currency Strategist at FXCM.