US Dollar
Over the past few trading days, we have seen a great deal of intraday volatility in the currency markets. The battle between top pickers and carry traders has been fierce with Asian and European traders opting for the former and US traders opting for the latter. Carry traders aren*t giving up quite yet as we see evidence of consistent buying throughout the US trading session. This is the same sort of price pattern that we saw yesterday, which indicates that the battle is continuing with no clear winner in sight. What the price action does tell us is that there are strong players on both sides of the spectrum and should one triumph over the other, the reversal or continuation will be just as sharp as the rally that we have seen over the past month. Dollar bearishness is still the dominant force in the market as economic data continues to disappoint. Jobless claims were originally expected to drop significantly after the blip reported the prior week, but instead, claims only edged lower slightly. The Philadelphia Fed survey remained unchanged at 0.2, confirming the lack of growth in the manufacturing sector. With both the Empire State Manufacturing and the Philly Fed surveys falling short of expectations, the national ISM index for the month of April which is not due for release until a week and a half from now, will probably remain very close to the 50 boost / bust level. Looking ahead, we have zero data on the US calendar until next Tuesday. The only things to focus on are the speeches by Federal Reserve President Mishkin on the outlook for the US economy and Treasury Secretary Paulson at the China conference. Given the hot GDP numbers reported by China yesterday, we definitely expect some critical comments by the Treasury Secretary. With nothing on the calendar, the obsession with whether carry trades will or will not continue should remain dominant.

Euro
Liquidation of EUR/JPY carry trades sent the Euro tumbling to 1.3565 against the US dollar. Despite this minor hiccup, Euro traders are still intent on taking the currency pair for a test of its December 2004 1.3667 all time highs as their determination was evidenced in the currency pair*s complete turnaround during the US trading session. For the first time in this latest wave of Euro strength, we heard comments from ECB officials about the level of the currency. Interestingly enough, rather than being critical about the currency*s strength, he said that the Euro*s exchange rate level is not a concern and that inflation remains a risk. His view that interest rates remain accommodative is aligned with the central bank*s overall stance. This is yet another green light on the road to further gains in the EUR/USD as we look forward to at least one and possibly two interest rate hikes by the end of the year. Eurozone data is beginning to disappoint with German producer prices falling short of expectations while Italian industrial orders actually dropped in the month of February, contrasting with the market*s forecast for a rise. We will be watching carefully to see if this anomaly becomes a trend. Looking ahead, we have French consumer spending and the Italian trade balance tomorrow. On a day devoid of any US data, strong numbers could drive the currency pair to fresh record highs.

British Pound
After plunging back below the 2.000 mark momentarily, the GBP/USD stabilized throughout the US trading session. The initial selling was triggered by liquidation out of GBP/JPY which saw a 300 pip wide trading range today. Now trading at 2.0018 at the New York close, the sterling bid tone may return with a vengeance as traders set their targets on tomorrow's retail sales report. Although the growth in consumer spending is expected to slow from the prior month, the sharp rise in wages could lead to an upside surprise. The report is still expected to only add to the already vehemently hawkish bias that is purporting a continually appreciating currency. No other central bank has as clear of a need to raise interest rates as the Bank of England. Incidentally, the market has now even begun to price in the possibility of a 50 basis point hike in May. Although this is very unlikely, the BoE has long been a policy maker that likes to catch the market by surprise.

Japanese Yen
The Japanese Yen was the story of the day as stronger economic data from Japan and China sent the currency tumbling against everything in sight. The early Asia trading session started with a sharp surprise in the tertiary activity index for the month of February. Originally expected to drop by 0.5 percent, activity actually accelerated by 1.0 percent. We expect this trend of upside surprises to continue as the recent weakness of the Japanese Yen boosts overall economic growth. Consumer spending on the other hand was not so hot. Tokyo department store sales fell 2.2 percent while nationwide sales dropped by 1.5 percent. Bank of Japan Governor Fukui downplayed the data by saying that consumer spending remains solid. The second wave of JPY buying was triggered by the sharp rise in Chinese GDP. Despite their efforts to cool growth, the economy has only continued to expand at an impressive pace. This spurred speculation that the central bank may be forced to raise interest rates. The Chinese stock market suffered greatly as a result and the Yen pairs followed suit. The recovery afterwards however still reflects the market*s obsession with the carry trade.

Commodity Dollars (AUD, NZD, CAD)
The Commodity Currencies are all weaker on the day as the liquidation of high yielding currencies sent the Australian, New Zealand and Canadian dollars tumbling against the US dollar. Australian data disappointed with consumer inflation expectations dropping in the month of April. We are expecting Australian import and export prices tonight. Softer numbers are expected as the strong Australian dollar drives inflation lower. We do think that any risk will be to the upside however. Canadian data on the other hand continues to remain hot with consumer prices accelerating by 0.8 percent month over month and 2.3 percent year over year. Wholesale sales were strong and we expect tomorrow*s retail sales to rebound as well.

Kathy Lien is the Chief Currency Strategist at FXCM.