US Dollar
Despite strong corporate earnings and the rally in the stock market, the US economy may still be in trouble. Sales of existing homes suffered their biggest drop in 18 years due to poor weather, a correction from stronger January and February levels, spillover from the sub prime sector and the reluctance of existing homeowners to reduce prices. Consumer confidence also hit an 8 month low as rising gas prices at the pump raised concerns about income and business conditions. Consumers are also wary about the current conditions in the labor market and the outlook for jobs in the months ahead. The timing of this disappointment is particularly interesting because it suggests that consumers are immune to the rally in the Dow. Back in March 1999, when the Dow broke 10,000, consumer confidence was on the rise in the months leading up to and after the break. However this time around, consumer confidence has been floundering with the March confidence reading marking the second consecutive deterioration in sentiment. This is a harsh reality check for FX traders who have completely written off the possibility of an interest rate cut by the Federal Reserve sometime this year. We will need to see tomorrow's durable goods and new home sales figures before making a further assessment. Existing home sales are notorious for being backward looking since they reflect transactions completed in March. New home sales on the other hand will reflect contracts signed and entered into during the month of March, which is a more up to date measure of how the housing market is doing. The return of more seasonal weather should have helped sales while durable goods could benefit from the recent weakness of the US dollar. Even though the dollar on balance is down for the day, the greenback's individual performance against different currencies has varied like night and day. The dollar is stronger against the Japanese Yen, Canadian dollar and British pound, but weaker against the Euro, Swiss franc, Australian and New Zealand dollars. We do not expect this dynamic to change all that much as the movements in the Dow sway the behavior of USD/JPY and other high yielding currency pairs, leaving the market's perception of US fundamentals more accurately expressed through the EUR/USD.

Euro
The Euro is stronger today on the back of weak US data. The market has shrugged off the sharp decline in Eurozone industrial orders in anticipation of a stronger German IFO report. Both the German ZEW survey of analyst sentiment and the Belgium business confidence indicator, which are leading indicators for the German IFO report surprised to the upside. Despite higher oil prices, the prospect of another interest rate hike and a strong Euro, the sentiment in Europe remains very optimistic. The Euro is closing in on its all time high of 1.3667, having already taken out its record high on a closing basis. European officials continue to be relatively nonchalant about the rise in the currency with ECB Tumpell-Gugerell praising the outlook for growth. This leaves the central bank on track to raise rates in June.
Meanwhile in Switzerland, we had mixed economic data. The UBS consumption indicator improved from 2.031 to 2.131, but the trade balance deteriorated. Comments from SNB member Hildebrand continue to be supportive of the Swiss franc. He warned that the central is ready to defend the currency if it threatens financial stability. Monetary conditions remain stable, which also keeps the Swiss National Bank on track to raise interest rates in June.

British Pound
The British pound is back above 2.000 after weak US data brings the divergence between US and UK monetary policies back to the forefront. Comments from Bank of England monetary policy officials confirm the central bank's need to raise interest rates as early as May. In a testimony to the House of Commons Treasury Committee, MPC member Barker noted that demand growth was stronger than expected while Blanchflower and Besley warned that both money supply and consumer prices pose upside risk to inflation. UK data was mixed with the stronger public finances and net borrowing figures offset by the weaker CBI manufacturing orders survey. Looking ahead, first quarter GDP is due for release tomorrow. Retail sales in the first quarter was soft with sales falling 1.5 percent in January, rising 1.6 percent in February and falling 0.3 percent again in March. Industrial production was also modest while the trade balance deteriorated. This suggests that even though the economy is still expected to grow, the risk of an upside surprise remains limited.

Japanese Yen
Despite a stronger inflation number this morning, the Japanese Yen fell victim to Dollar, Euro and Swiss Franc strength. Once again, the Yen pairs have been moving in lockstep with the Dow as the stock market's intraday reversal leads to a reversal in USD/JPY. There is still a lot of Japanese economic data due out this week, most of which is expected to be Yen positive. We have the trade balance this evening. The weakness of the Yen should drive strong exports throughout the month of March. We are also moving into Golden Week, which is a period that most Japanese take off for holidays. Over the past 10 years, USD/JPY either rallied in the week leading up to the holidays or the week of the holiday 6 out of the last 10 times. As for the other years, USD/JPY was unchanged in 2 out of the 4 remaining years and rallied in the other 2.

Commodity Dollars (AUD, NZD, CAD)
The Commodity Currencies are all weaker across the board on the back of softer economic data and lower gold and oil prices. Australian consumer prices increased by only 0.1 percent in the first quarter, which was much lower than the market's 0.6 percent consensus. Canadian leading indicators also increased by only 0.4 percent compared to the market's 0.5 percent consensus. On top of that, the Bank of Canada left interest rates unchanged today at 4.25 percent. Comments from the central bank was a tad more hawkish than the prior statement as the policy making committee indicated that there was a "slight tilt" to the upside in inflation risks. Even though this decision was in line with expectations, the Canadian dollar weakened because some traders were looking for even more hawkish rhetoric. Looking ahead, Australian and Canadian markets are closed for ANZAC day, leaving the next big event on the calendar to Wednesday afternoon, when the Reserve Bank of New Zealand announces their interest rate decision.

Richard Lee is a Currency Strategist at FXCM.