By DailyFX - US Dollar .It has been a quiet trading day today with Federal Reserve Chairman Ben Bernanke avoiding any comments on the economy...

... or monetary policy in his speech earlier this morning.


It appears that he does not want to bring
any more attention to his recent comments for a pause in the central
bank's interest rate cycle * perhaps signaling that he is
comfortable with Maria Bartiromo's comments. Meanwhile the US dollar
lost ground against all of the majors except for the Japanese Yen and
the Canadian dollar despite another dose of stronger economic data.
Echoing the rise in yesterday's manufacturing sector ISM report,
non-manufacturing ISM also jumped from 60.5 to 63.0 with a similarly
large rise in the prices paid component of the report. Factory orders
also rose by a more than expected 4.2 percent while oil prices dropped
over $2 on a larger fuel supply report. When the market ignores
repeatedly good economic reports, it becomes clear how strong of a hold
bears have on the dollar at the moment. The dollar is weaker against
the Aussie and Kiwi following Australia's interest rate hike, but the
divergence in its performance against the Yen and the Euro suggests that
all eyes are now on the European Central Bank's interest rate decision
tomorrow. As we mentioned yesterday, the market is pretty divided on
whether they expect hawkish or dovish comments from the central bank
President. It is believed that Medley Global Advisors, a newsletter
service closely followed by hedge funds thinks that the ECB will be
dovish while many bank analysts expect them to be hawkish. With
respected experts on both sides of the spectrum, we warn once again to
be prepared for some nice volatility tomorrow morning. Once that is out
of the way, the market will immediately shift gears to Friday's
non-farm payrolls report. The employment components of the ISM surveys
and recent jobless claim reports suggest another month of strong
performance for the labor market with US companies adding on another
200,000 jobs. However, given the market's lack of reaction to other
strong reports that have been recently released, it is quite possible
that the upcoming NFP report could be more of a non-event unless of
course it deviates from expectations by 50k or more.

Euro

With no economic data on tap today, the Euro strengthened slightly
against the US dollar but failed to breach Monday's high once again.
The central question that ECB President Trichet will answer for us
tomorrow morning is how comfortable he is with the current level in the
Euro. We have long said that the stronger the Euro, the bigger the
strain on the Eurozone economy. Admittedly, many bank analysts are
arguing that recent economic data has been fairly strong, but as any
central bank President should know, the effects of currencies tend to be
delayed. Therefore in order to prevent a sharp slowdown, it is
important to be proactive rather than reactive. In the past, the ECB
has shown grave concern for a rapid rise in their currency and have been
fairly vocal about it. However, this time around, it is interesting
that we have barely heard a peep from central bank officials. Perhaps
inflationary pressures from rising energy prices are becoming very
worrisome for them at this point. Either way, we do not expect an
interest rate hike tomorrow and we still do expect a quarter point rate
hike in June. Beyond that, it is fair game. If Trichet tones down his
comments, we could easily see a move down to 1.25. On the flip side, if
he remains hawkish, the Euro could take stab at breaking its most recent
Monday high.

British Pound

The British pound continued to churn higher against the US dollar but
gave back some of its gains against the Euro. The pound has been one of
the best performing currency pairs this week thanks to a handful of good
economic data and continued interest in pound denominated investments.
In the first quarter, merger and acquisition activity was the most
aggressive in 4.5 years. We also recently reported that Middle East
investment in UK commercial property doubled last year. However after a
wave of good news, today's reports were less optimistic. In contrast
to yesterday's sharp rise in construction sector PMI, service sector
PMI fell from 54.7 to 53.7. Most worrisome was the housing market
component which also slipped last month and conflicts with other recent
reports indicating stabilization in the sector. On top of that, the BRC
shop price index declined in the month of April while wage growth slowed
suggesting moderation in the economy's gradual recovery. Pound
traders continue to closely await the central bank's Quarterly
Inflation report tomorrow. Given the rise in energy prices, the central
bank could notch higher their inflation forecasts, which would be a
green light for the market to take the GBP/USD above 1.85.

Japanese Yen

With Japan out for holidays, the yen sold off against all of the majors
except for the US dollar. If you haven't realized it yet by reading
our commentary, the yen's price action against the dollar has diverged
significantly from its move against any of the other currencies.
Japanese Finance Minister Tanigaki retreated today that the G7 statement
is not calling for a decline in the dollar. Whether that is true or
not, we do not know since the G7 comments were quite clear. However, it
is now obvious that the government is becoming increasingly nervous
about the value of the yen, especially since they should be on holiday.



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

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