By DailyFX - US Dollar. Trading has been extremely quiet today with most major currency pairs ending the day unchanged against the dollar.

There was...

... little for the
market to work off of with no economic data released and both Federal
Reserve Presidents Olsen and Bies failing to deliver any market moving
comments. For the most part, the dollar is still in limbo as the market
tries to figure out how far the Fed will go. Last Friday's comments
from Federal Reserve President Poole has imprinted in the heads of
traders that 5.25 percent rates is quite feasible. Some banks are now
even calling for 5.5 percent or 6 percent rates. If you tack on the
fact that the European Central Bank threw cold water on speculation for
a May rate hike and it is no wonder that the dollar is still holding
onto most of its strength. Everything centers on retail sales and the
trade balance in this shortened trading week (Good Friday brings forth
early closes on Friday). After the sharp drop in retail sales in
February, the market is looking for spending to have rebounded last
month. If retail sales disappoints, we expect analysts to start
screaming about the impact of the contraction in the housing market on
spending. Even if sales do increase, we need to be careful and make
sure that sales are not increasing just because receipts at gas stations
are higher. With gas prices creeping to $3.00 gallon in some locales,
we see this as more a detriment to future retail sales than a benefit.
However before we even focus on retail sales, we first have to clear the
air on trade. The market is forecasting a $67.9 billion deficit in the
month of February, which represents a contraction of $0.6 billion, but
even so there is a lot of uncertainty surrounding the report with Morgan
Stanley calling for a wider deficit and Barclays calling for a narrower
one. Uncertainty to us simply means one thing and that is volatility.
Hopefully we will get to see more action rather than consolidation on
the back of these reports.

Euro
Last week the European Central Bank confirmed to the market that they
plan on delivering nothing more one rate hike a quarter. This more
conservative timetable has tipped the Euro over and despite a mild
recovery today, the single currency still remains under pressure. Good
news on the political front should ease some of the worry that the
protests in France could spill over into something bigger. French Prime
Minster Dominique de Villepin announced today that it plans to drop the
controversial labour reform law, which should put an end to latest round
of protests in France. Yet, politics is not completely out of the way
with Italian elections too close to call. Berlusconi and Prodi have
both received a close number of votes which means that neither received
a large majority. If this is true, Italians may be forced to go back to
the polls once again and it is probably going to be a while until we get
clearer results on who will become the new Prime Minister. In the
meantime, this will allow the market to turn its full focus onto
tomorrow's ZEW report. After coming in much weaker than expected last
month, the market is betting on a nice rebound this month. Business
sentiment has retained its strength and given signs that the ECB is
planning on slowing down its pace of tightening, analysts may turn a bit
more bullish on the economy as looser monetary conditions remain for
longer. However, in all likelihood, the ZEW survey was taken before
Thursday's ECB meeting and judging from this morning's French
industrial production numbers which came in much weaker than expected
(falling 0.9 percent in the month of February), the rebound in sentiment
may not come for at least another month.

British Pound
Recovery was the theme of the day in the British pound. The Queen's
currency gave back some of Thursday and Friday's gains against the
Euro and ended the day unchanged against the dollar. UK data released
this morning was mixed. According to the Office of the Deputy Prime
Minister, house prices rose a less than expected 3.6 percent in the
month of February. This comes as a grave disappointment since recent
figures from private organizations have shown a gradual recovery in the
UK housing market. In fact, numbers were so promising that analysts
were calling for house price growth to increase from 4.3 percent to 4.9
percent. Producer prices were conflicting with input price growth
slower than expected and output price growth stronger than expected.
This suggests that producers are passing more price increases over to
consumers. Over the next 24 hours, we are expecting the BRC retail
sales monitor and the trade balance for the month of February. With the
British pound showing more overall weakness than the Euro, poor data
could exacerbate losses in the pound.

Japanese Yen
The Japanese Yen has lost ground against the US dollar for the third
consecutive trading session despite stronger machinery orders. The
market is treading carefully ahead of the Bank of Japan's monetary
policy decision and the release of their monthly report. We will be
looking for signs of what the central bank's timetable may be for an
interest rate hike. There was a lot of fanfare last week when an
advisory report suggested a rate hike could come sooner rather than
later. Governor Fukui is slated to talk at a post meeting press
conference shortly after the monetary policy decision. USD/JPY and
EUR/JPY are trading near important resistance levels. Should Fukui be
more hawkish, it would be a perfect marriage of technicals with
fundamentals. There is no question that everyone is sitting at the edge
of their seats waiting for the Bank of Japan to make their move.


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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