By DailyFX – Yen received no help from the better than expected Trade Balance data tonight as the rally in Asia Pacific stock markets fueled… … more carry trade flows and the unit lost ground against all the high yielders including the greenback.

With BoJ essentially sidelined until after the
summer election, trading in yen these days is driven strictly by the two
opposing forces of demand for carry versus fear of financial risk.
Thus, the yen is unlikely to rally significantly unless equity markets
across the world begin to weaken.

Yesterdays Fed statement was interpreted as dovish by both the equity
and the currency markets, but after further consideration the FX markets
tempered their unadulterated dollar bearish view and the EURUSD declined
on a round of profit taking after running stops at the 1.3400 level. In
addition to expressing concern over the troubles in the housing market,
the Fed also made a reference to rising inflationary pressures, noting
specifically that the Committees predominant policy concern remains
the risk that inflation will fail to moderate as expected. The key
question, therefore facing the FX market at this time, is whether
housing woes will outweigh the burbling price pressures evident in the
US economy. To that end this Fridays US Existing Home sales report and
next weeks New Home Sales release will be critical to determining the
near term direction of US monetary policy and the fate of the greenback.
If the housing sector begins to crater, the markets will begin to
believe that the Fed will have no choice but to ease rates regardless of
the rise in inflation. If on the other hand housing stabilizes, the Fed
is likely to keep rates steady for some time and the recent dollar
shorts made on the assumption of a Fed rate cut may be forced to cover.

Meanwhile in UK today the economic news continued to be positive as UK
Retail Sales blew past expectations rising 4.9% on a year over year
basis. Given last months negative results, there was fear in the markets
that the UK consumer may be reaching the point of exhaustion. However,
todays report dismissed all those worries proving to be consistent with
the recent evidence of a material pick in UK economic data. That data
included, faster than expected house price gains, and hotter CPI
numbers. In short, the UK Retail Sales report ratchets up the
possibility of another rate hike by the BoE as early as its April 5th
MPC meeting and cable responded in kind by rising above the 1.9700
figure in early London trade.