Will Dollar Direction Be Dictated By This Week’s Data?
Relatively mixed on the day, the US dollar was neither stronger nor weaker against the majors as conflicting sentiment helped to keep the greenback in neutrality. On one end of the spectrum, dollar strength was obtained on flight to risk aversion following statements by Chinese officials of further monetary tightening in the country. With liquidity still a concern on carry trades, softness in currencies like the Euro and pound helped to boost dollar enthusiasm, albeit temporarily, throughout the day. Treasury markets seemed to confirm overall speculation in risk aversion as US 10-year benchmark bond yields continued to pare back in the New York session, falling another 5 basis points to 5.07 percent. However, comparatively bucking the good vibes for the US single currency were less than exemplary results from the economy’s only suggestive report on Monday. According to the most recent housing data, it seems that housing supply is growing against a lack in consumer demand and not higher levels of production. Granted, the notion is already widespread, but today’s existing home sales report lends confirmation to the fact that current state of affairs compares to the worst housing recession in almost 16 years. Ultimately, this is cause for worry as repercussions are sure to follow in softer weaker retail figures (which have already been witnessed) in the world’s largest economy. Subsequently, thinner consumer demand will more than not produce a dovish solution by the Federal Reserve, set to meet this week. Exacerbating dollar negative tones throughout the week is a bevy of bearish results in this week’s schedule of events. As it stands, with consensus estimates to the downside, the dollar may need more than bond yield speculation and equity index good vibes to turn things around.

Euro: Appreciating To 1.3500 And Beyond?
There was only one piece of news for the Eurozone and it was confined to the German GfK consumer confidence survey. Although standing as the only pertinent survey for the European economy, the report had positive undertones and helped to establish at least a thin direction in the market heading into afternoon trading. It seems that consumers are remaining increasingly confident compared to previously noted pessimism by regional businesses. The consumer confidence report for the month of July fared far better, rising above expectations and printing an 8.4 for the German economy. The recent figure is an improvement over the 7.4 seen in the month of June and spells further upside in the Euro currency as speculation is already pricing in a string of rate hikes by the ECB. Notably improvements were most seen in the index subcomponent measuring consumer demand, as the sector jumped to positive territory marking 9.1points. Next up for Euro bulls, French housing starts and Italian business confidence. However, given the blatant dollar overtones for the week, the bits of economic data will mean little in tomorrow’s session.

Yen Gains Across The Board On Carry Fears
The Japanese yen was supported throughout the New York session following overnight news that interest rates may well be increased again in the Chinese economy. Although, the two economies are very separated in economic and governmental policy, they are intertwined on the basis that when risk aversion hits, Chinese markets trend lower and yen carry trades are unwound. Similar situations have emerged throughout the year, with the most recent one being last month, May 29th, when officials tripled the stamp tax on stock transactions. Stock markets in Shanghai lost considerably in the overnight as the yen advanced against higher yielders like the Pound sterling and the Euro. An even better visual can be read in the February 27th global rout as equity markets around the world were emptied out, helping the yen. As a result, with the Bank of Japan likely out of the picture for the moment, yen momentum will be established by market risk and not Japanese monetary policy. However, this week’s theme may be slightly different as economic data is in full force for the world’s second largest economy. Should figures be optimistic for a rate hike in September, yen favoritism may very well build on fundamental justification.

Pound Surges To Test $2.0000 Figure On Hawkish Expectations
Pound bulls were out in full force following expectations, and subsequently powerful speculation, that BOE Governor Mervyn King will maintain his hawkish stance when policy makers meet again in July. Even beyond that , speculation is now emerging that interest rates may have to extend out to another rate hike, helping the benchmark rate to climb above 6 percent as inflationary pressures continue to rise in the UK economy. Ultimately, the bullish notion is likely to remain in the market, helping to keep the pound sterling supported just below the 2.0000 figure until this week’s pivotal releases help to break the currency out of its recent ranges. Traders will keep an eye out for Nationwide housing prices and gross domestic production reports, both of which are expected to lend further strength to the current sentiment.

New Zealand Rockets Higher, Market Doesn’t Fear Bollard
It seems that the Reserve Bank of New Zealand was at it again, intervening in the markets (or at least that’s what’s being speculated on) last Friday. Nonetheless, carry traders are remaining steadfast in their quest for higher yields as the underlying currency was able to touch a 22-year high with many expecting further attempts by the central bank to fail. Already intervening for the rumored third attempt, it seems that Bollard and fellow central bankers are running out of steam as many continue to focus on at least one more rate hike by the end of the year. However, market event risk is emerging in the form of the nation’s trade balance which may turn the tide in the bank’s favor. Consensus estimates are looking for a return to surplus, with a deficit likely to push the Kiwi lower in the short term tomorrow night.

Kathy Lien is the Chief Currency Strategist at FXCM.