Euro Sets Fresh Record of 1.3798 Against Dollar, 168.84 Against Yen
Euro bulls were out in full force today, helping to set new record highs against the US dollar and the Japanese yen, with EUR/USD hitting 1.3798 and EUR/JPY surging to 168.84. The impetus was from an unexpected revision to first quarter GDP to 3.1 percent from a year earlier, led by business investment and surprisingly, export growth. In fact, exports were revised up to 0.8 percent from 0.3 percent, signaling that the appreciation of the euro did little to quell demand for European products. Furthermore, with expansion in the Euro-zone remaining so resilient, the European Central Bank will be more likely to enact policy tightening this year. However, markets will first need to see a pick up in price pressures before ramping up their bets on a hike to 4.25 percent, as CPI is still below the bank’s 2.0 percent ceiling.

US Dollar Index Falls to Fresh Multi-Year Lows
The greenback moved broadly lower against major counterparts, with the NYBOT-traded Dollar Index falling to fresh multi-year lows. Such a decline was largely a matter of overall bearish momentum, with apparently little reason to push the dollar lower through short-term price action. In fact the morning’s economic data was marginally bullish for the currency; the Trade Balance result fell exactly at consensus estimates of a $60.0 billion deficit but Initial Jobless Claims fell to their lowest since May. At only 308k new jobless, the data suggests that layoffs may have slowed through the week ending July 7th. Though the news failed to force noteworthy moves across forex pairs, it will be important to note whether we can continue to see such an improvement through the coming weeks. Through shorter term price action, all eyes will turn to tomorrow’s Advance Retail Sales report. Current forecasts predict that consumers scaled back spending in June after May’s impressive 1.4 percent gain. Suffice to say, however, two consecutive months of strong gains could easily force a dollar retracement.

Bank of Japan Keeps Rates Steady, Focus On August
Economic data was of little importance as traders looked at the highly anticipated Bank of Japan monetary policy meeting, only to be disappointed in the overnight session. As expected, the decision was to leave the benchmark rate alone at 0.50 percent spurring further speculation that the August decision will be a hike of 25 basis points. Notably, the vote was cast as an 8-1 victory with the lone dissenter being Board member Atsushi Mizuno. Previously, member Mizuno and two other policy makers were unsuccessful in their first bid for a rate increase back in January, preceding a rate hike the following month. Fostering the overwhelming decision to leave rates steady seems to be concern that growth would be paring back in the second quarter. Estimates are set on seeing 1 percent growth in the world’s second largest economy, vastly lower than the 3.3 percent in Q1. The notion will likely lend to further suppression in consumer prices, making interest rate hikes unwarranted. “There’s no change in our expectations that the economy will continue this lasting growth.” However, Governor Fukui noted in subsequent statements that expansion in the second quarter looks to be a “bit weaker than the first quarter” as steadfast focus remains on industrial output and inflationary indications. If output and CPI are any harbinger, traders may not see rate hikes any time soon. For the most recent month, industrial production fell for the third month running as prices declined for the fourth.

UK Housing Price Inflation Slows In June
British pound speculation was confined to the RICS housing price balance report in the overnight as the underlying price action remained higher above the 2.0300 support figure. Although widely disregarded on the heels of the US trade balance report in New York, the survey did spark some suggestions that the recent string of BOE rate hikes may be taking effect. According to the report published by the Royal Institution of Chartered Surveyors, housing price growth was the slowest since January of 2006. Falling short of the 21.0 estimate, the housing price balance increased to 10.6 as the previous figure was revised downward to 22.5 in May. Bearish for the pound sterling, the news isn’t all that bad considering comparable results from other regional housing sector reports. Other surveys actually depict a different picture, showing robust housing demand and supported valuations. The differences in reports lends to a weaker conviction of a housing sector selloff and is helping the pound in the short term.

Canadian Dollar Sub-1.0500, Australian Dollar Takes On New Multi-Decade Highs
The Canadian dollar pressed higher once again today, with USDCAD hitting lows of 1.0455 as economic data has proven to be bullish for the currency. The new housing price index for the month of May surged a greater-than-expected 1.1 percent, up from 0.8 percent the month prior. The sector remains buoyant as a whole with tight labor market conditions helping to fuel wage growth and drive up home purchases. Meanwhile, the international merchandise trade surplus for May beat estimates as well, reaching C$5.9 billion, matching an upward revision to the figure for the month prior. This is particularly encouraging given the strong appreciation of the Loonie during that period, which has apparently not yet deterred demand for Canadian exports. Meanwhile, the Australian dollar brushed off softer-than-predicted labor market figures and rallied to new multi-decade highs of 0.8657, as the unemployment rate surprisingly picked up to 4.3 percent. The New Zealand dollar edged higher as well on an empty calendar, but the release of retail sales this evening has the potential to lead NZDUSD up towards 0.7850.

Kathy Lien is the Chief Currency Strategist at FXCM.