By DailyFX - US Dollar. Stronger US economic data has helped the trade weighted dollar end the day virtually unchanged. Retail sales staged an...

... exceptionally strong recovery, rising 2.3 percent in January after increasing a modest and downwardly revised 0.4 percent the previous month.


This is the biggest rise in sales that we have seen since May 2004 and best
yet, the sales excluding autos component also hit a 6 year high. The US consumer
continues to buy up everything in sight, which means that regardless of whether this
behavior is sustainable or not, in the immediate future, it means that we could see
a nice pop in first quarter GDP. A strong rise in the figure due out on in April
will help traders completely forget about the horrid number released last month.
Sales have been strong thanks to record mild temperatures and lower gasoline prices.
The new Fed Chairman Ben Bernanke now has some ammo under his belt when he ascends
Capitol Hill tomorrow if he chooses to give some sort of validation that there could
be one more rate hike in May. His much awaited semi-annual testimony to Congress on
the economy and monetary policy is this week's main event. Not only are we going to
be listening carefully to his assessment of how the risks to the economy and
inflation are tilted, but also to his responses during the question and answer
session * expect Bernanke to be grilled. Greenspan mastered the art of tactfully
answering questions while managing market expectations during his tenure, which will
make it particularly interesting to see whether the usually clear speaking economist
will be able to do the same under such intense pressure. Aside from Bernanke's
speech however, we should not lose sight of the fact that the net foreign security
purchases, also known as the Treasury International Capital (TIC) flow report is
also due for release. After rising $89.1 billion in December, purchases are
expected to increase by another $76.2 billion, still more than enough to cover the
trade deficit. Unless we see foreign purchases sink below $60 billion, we expect
the TIC report to be a non-event. Yet, market volatility in the dollar can also
come from the Empire State manufacturing survey, the industrial production report or
the NAHB housing market index. So clearly, tomorrow will be quite a day and it is
no coincidence that many currency pairs are also at a crossroad and looking to
tomorrow's developments for direction.

Euro
The Euro rebounded slightly against the dollar today despite another dose of weaker
economic data. The market had expected German GDP growth to increase by 0.2 percent
in the fourth quarter, but instead growth was flat. The ZEW survey of economic
sentiment also dropped from 71.0 to 69.8. The only glimmer of hope was that the
current conditions component remained unchanged at -19.5. This was actually taken
as positive since the market had expected that component to drop to -28. In the
Eurozone as a whole, GDP growth slowed to an as expected 0.3 percent from 0.6
percent. The ZEW survey of economic sentiment fell modestly to 66.0 from 66.1.
Overall, we see that conditions and sentiment in Europe is deteriorating, led
primarily by a slowdown in Germany. However in the grand scheme of things, this
will still not prevent the European Central Bank from moving forward with their plan
to raise interest rates. Eurogroup Chairman Jean-Claude Juncker joined the chorus
of ECB officials hinting to the market that their expectations for a March rate hike
are valid. He noted that the ECB will probably do as the market expects. We
already mentioned on numerous occasions that the ECB's justification for a rate hike
in the context of weak economic data comes from the fact that they are looking
ahead. As the strength in the Euro has led to the recent downturn in the economy,
the present weakness of the Euro should help stimulate the economy extensively and
possibly even so much that the ECB feels the need to be preemptive by tackling
problems before they surface.

British Pound
Once again, the British pound has been unable to join the EUR/USD in rallying today.
Weaker inflation figures have given sterling bears support to question the
possibility of a rate cut by the Bank of England once again. The market has been
juggling the thought of whether the BoE will continue to remain neutral or as some
have forecasted lower rates sometime over the next few months. Tomorrow's Bank of
England Quarterly Inflation report might be able to help us answer this question.
Meanwhile CPI fell 0.5 percent in the month of January, bringing the annualized rate
to 1.9 percent, which is the first time it is below the central bank's 2 percent
target since May. This is quite a big surprise and should definitely deal a blow to
those expecting interest rates to remain at 4.50 percent for the remainder of the
year, especially considering that the original forecast was for annualized inflation
to increase from 2.0 percent to 2.1 percent.

Japanese Yen
For the third consecutive day, the Japanese Yen licked its wounds and continued to
recuperate its losses against the dollar. The Nikkei has also staged a strong
recovery after experiencing a triple digit sell-off the previous day. Like the rest
of the world, interest rate expectations are the biggest focus for traders at the
moment. The Japanese government still seems to be reluctant in allowing the Bank of
Japan to remove its quantitative easing, which means that for the most part, the US
dollar will continue to drive the direction of the currency pair. Japan's fourth
quarter GDP report is due out on Thursday, which is Japan's key economic release for
the week and could deliver us some interesting price action. The market is setting
the bar high and expects growth to have been exceptionally strong in the last few
months of 2005.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com
By DailyFX

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