US Dollar
In the foreign exchange market, there are times when politics can trump economics. Even though we did not have any breaking developments, the lack of meaningful US economic data turned the market’s focus today to the potential for political change. Foreign investors were never happy with the US’ presence in Iraq or with Iran’s progress on nuclear development. Although neither has been resolved by today’s news, the Senate’s approval of legislation that outlined a timetable for withdrawal and reports that Iran may be reaching agreeable points with the EU have given foreign exchange traders a reason to rally the US dollar. The only economic data released today were jobless claims and the help wanted index. Both are minor reports but in the context of next week’s non-farm payrolls release, we cannot help but pay attention to them. The help wanted index slipped from 31 to 30 in the month of March while jobless claims dropped from 341k to 321k, leaving the 4 week moving average at 332k. This represents a significant jump from the 317k average that we saw last month as well as a return to February levels. Taking that information into context, we can estimate that non-farm payrolls will be much closer to the 113k reading that we saw in February than the 180k print in March. The current consensus estimate for April payrolls is 100k. However as long as we have triple digit job growth, the Federal Reserve is probably happy to continue sitting on their hands. What does this mean for the US dollar? That even if the dollar manages to recover more losses the EUR/USD could still have a shot at 1.40. Don’t forget that the European Central Bank and the Bank of England are still on track to raise interest rates next month. We have two weeks before the rate decision and there are a lot of data between now and then. In the meantime, our primary focus is tomorrow’s first quarter GDP report. Growth is expected to have slowed from 2.5 percent to 1.8 percent. We actually think the data could be a bit better since consumer spending, which accounts for 70 percent of GDP only worsened slightly in the first quarter. Retail sales in the first three months of the year averaged 0.6 percent, compared to average sales of 0.7 percent in the last three months of 2006.

Euro
After flirting with its all time highs yesterday, profit taking has hit the EUR/USD. More upside surprises in economic data however continues to suggest that economic growth in the region is accelerating. German consumer confidence increased from 4.4 to 5.5 for the month of May while French business confidence increased from 109 to 111 in the month of April. These measures of stronger sentiment follow similar upside surprises in German analyst and business confidence. It seems that everyone in the Eurozone from businesses to consumers is happy which means that we could also see stronger spending in the weeks ahead. In addition to the confidence data, we also had import prices, which increased more than expected. This suggests that we could see also firmer retail PMI numbers tomorrow. Overall, incoming economic data only further confirms that the economy could weather another interest rate hike so the ECB should have no hesitations about raising interest rates in June. Meanwhile Switzerland will be releasing the KoF leading indicators tomorrow. Upside surprises in the UBS consumption indicator, retail sales and the Swiss ZEW survey suggests that the number could be very positive for the Swiss Franc. EUR/CHF is struggling to extend its rally and a weak number could easily reverse the currency pair’s two day rise.

British Pound
The British pound weakened significantly against the US dollar today after Bank of England member Tucker warned that UK consumer prices could fall significantly in the months to come. His thesis is based upon steady oil prices keeping inflation intact. The sharp intraday reversal in oil has helped his credibility but overall UK economic data continues to highlight the general health of the UK economy and the UK housing market. According to the Nationwide Building Society, house prices increased by 0.9 percent in the month of March, which compares to the market’s 0.6 percent forecast. This drove the annual rate of growth up to 10.2 percent from 9.3 percent. There is no more UK data due for release this week which means that the pound’s fluctuations will be dictated by the abundance of US, Eurozone and Japanese data.

Japanese Yen
With an endless list of Japanese data due for release over the next few hours, the Japanese Yen will be the story of the night. We are expecting overall household spending, retail sales, Tokyo and national consumer prices, industrial production, PMI, jobless rate, housing starts, construction orders, the Bank of Japan monetary policy decision and the release of their semi-annual economic outlook. CPI and the economic outlook report will be the most important since inflation or the lack thereof has been one of the primary barriers preventing the Bank of Japan from raising interest rates. A flat CGPI reading and a drop in import prices suggests that CPI could be weak, but upside surprises in the other data could easily erase any Yen bearishness. Either way, expect some decent volatility in the Japanese Yen tonight.

Commodity Dollars (AUD, NZD, CAD)
The Commodity Currencies are weaker across the board as gold and oil prices both fall sharply on the day. Despite reporting a stronger leading index of economic activity, the Australian dollar was the biggest percentage loser in the currency market today. New Zealand’s surprise interest rate hike has many people in the markets speculating that the central bank has delivered their rate hike of this cycle. The fall in both the New Zealand and Australian dollars suggest that these traders could be anticipating a similar move by the Reserve Bank of Australia. The Bank of Canada also released their monetary policy report today. Dodge is expected to retire in January. The central bank remains concerned about inflation, but wary US growth. This indicates that even though the central bank is hawkish, they will be very conservative with delivering any interest rate hikes. 

Richard Lee is a Currency Strategist at FXCM.