The dollar had a knee-jerk rally after a government report showed the US retail sales remained strong. Retail sales rose at a monthly rate of 1.0% in December, beating the estimate of 0.6%. Excluding auto sales, core retail sales increased 0.9%, also better than the forecast of 0.7%.

However, the dollar pared its gains across the board later as the upbeat retail sales have already been priced in. The euro rose above 1.29 and the sterling tested 1.96 against the dollar. The dollar had an extensive gain this week, and today's move is more a brief technical move than a reversal sign. Recent economic data showed the US economy is likely to have a soft landing, cutting the expectations of a Fed rate cut any time soon. This week, two Fed officials, Chicago President Moskow and Dallas President Fisher, both indicated concerns on upside price risks. More economic data are needed to predict the next monetary policy move of the Fed.

The sterling continues its rally after the Bank of England surprisingly raised rates by a quarter percent yesterday, while the European Central Bank Chairman Trichet's dovish comments after its rates unchanged decision weighed on the euro. The single currency fell sharply versus the sterling to test the 0.66 level, the lowest since August 2004.

Interest-rate futures pricing show traders still see another rate increase by the BOE in March policy meeting.

GBPUSD encounters interim resistance at 1.9580, backed by 1.96, 1.9620 and 1.9650. Subsequent ceilings will emerge at 1.97, followed by 1.9730 and 1.9750. On the downside, support begins at 1.9550, followed by 1.9530 and 1.95. Additional floors are eyed at 1.9470, backed by 1.9450 and 1.94.

EURUSD will face interim resistance at 1.2950, followed by 1.2980 and 1.30. Additional ceilings will emerge at 1.3020, backed by 1.3050. Support starts at 1.29, backed by 1.2870, 1.2850 and 1.2820. Subsequent floors are eyed at 1.28.


Yen Remains Weak

The yen remains weak as investors scaled back their expectations on a BOJ rate hike in the first quarter. Even the Bank of Japan does raise its rates by a quarter percent next week, the interest rates are still so low that carry-trade investors will continue to borrow the yen to fund investments in high-yielding assets.

USDJPY encounters interim resistance at 120.50, backed by 120.70 and 121. Subsequent ceilings will emerge at 121.30, followed by 120.50. On the downside, support begins at 120.30 and 120, followed by 119.70. Additional floors are eyed at 119.50, backed by and 119.

At 12:00 AM Japan December Economy Watchers Survey (exp 49.5, prev 48.9) At 8:30 AM US December Retail Sales (exp 0.7%, prev 1.0%) US December Retail Sales ex-Autos (exp 0.6%, prev 1.1%)

The greenback remains firmer against the euro and yen, but trades on softer footing versus the sterling after the Bank of England caught markets off guard with a surprise 25-bp rate hike. In the session ahead, traders will focus on US retail sales from December due out at 8:30 AM New York time. The tone from retailers has been indicative of a disappointing holiday season, with most blaming warmer-than-usual climate. The retail sales report bears particular importance as a gauge for any spillover from the declines in the housing and manufacturing sectors of the economy. Markets will try to discern whether any slowdown in consumer demand should warrant greater attention by the Fed, ultimately prompting the FOMC to shift its focus on stimulating growth rather than containing inflationary pressure.

Yen Extends Slide

The yen continued to lose ground against its counterparts in the early Friday session, slipping to a fresh one-year low versus the dollar at 120.72 and approaching a near 9-year low to the sterling. Focus on global interest rate differentials is the primary culprit to the Japanese currency’s woes as the BoJ continues to be the laggard in global tightening of policy. It remains to be seen whether the Bank will lift rates when it deliberates policy next week, but it is clear that rate gap widened further yesterday when the BoE surprised markets with a 25-bp rate hike to 5.25%, now on par with the US.

Comments earlier from Bank of Japan Governor Fukui, in typical fashion, provided little clue on next week’s meeting. Fukui reiterated the BoJ’s oft-touted mantra of guiding monetary policy appropriately while closely monitoring the economy and prices. He expressed confidence, saying Japan’s economy continues to expand moderately and sees consumer prices remaining in a positive trend. He also anticipates consumption to rise moderately. Japan’s Chief Cabinet Secretary Shiozaki echoed a similar tone to Fukui, saying sustained economic growth is probable, but expects consumption to remain weak.

Japan’s liquidity continues to expand, with December’s broad liquidity up 2.7% from 1.9% previously. Meanwhile, M2+CD money supply for December matched forecasts, edging up to 0.8% from 0.7%.

Dollar/yen continues to creep higher, reaching its highest level since December 2005 at 120.72. Further gains will target ceilings at 121, followed by 121.30 and 121.65. Additional ceilings will emerge at 122, backed by 122.40 and 122.70. On the downside, support will start at 120.30, followed by 120 and 119.70. Subsequent floors will emerge at 119.40, backed by 119 and 118.50.

The Bank of England unexpectedly raised rates by a quarter percent to 5.25% this morning. The sterling soared broadly after the rate increase surprise. The currency strengthened from 1.9360 to 1.9535 against the dollar, and reached an 18-month high versus the euro at 0.6627.

Interest-rate futures pricing show traders see another rate increase by the BOE in March policy meeting.

GBPUSD encounters interim resistance at 1.9460, backed by 1.9480, 1.95 and 1.9535. Subsequent ceilings will emerge at 1.9550, followed by 1.9580 and 1.96. On the downside, support begins at 1.9430, followed by 1.94 and 1.9380. Additional floors are eyed at 1.9350, backed by 1.9320 and 1.93.


Euro Fell on Trichet's Cautious Tone

European Central Bank left its interest rates unchanged at 3.50% as expected on the policy meeting ended this morning. The euro pared its advance versus the dollar after ECB president Trichet did not call for vigilance on the inflation in his post-meeting press conference. He said the central bank will act in a firm and timely but he sounds more cautious than before. Trichet said the risks to the growth outlook are to the downside. He added there is no need to change present expectations on future rate moves.

EURUSD will face interim resistance at 1.29, followed by 1.2930 and 1.2950. Additional ceilings will emerge at 1.2980, backed by 1.30. Support starts at 1.2880, backed by 1.2850, 1.2830 and 1.28. Subsequent floors are eyed at 1.2770.


Yen Declines as Rate Expectation Faded

The yen declined against the dollar, sterling and euro as the expectations for a rate hike by the Bank of Japan started to fade away. The dollar broke the key resistance level at 120 against the yen.

Japan leading economic index dropped from 54.5 to 20 as expected in November, indicating the economy expansion may slow down. The market will focus on the Japan economy watchers survey due tonight. It is expected to increase from 48.9 to 49.5 in December.

USDJPY encounters interim resistance at 120.50, backed by 120.70 and 121. Subsequent ceilings will emerge at 121.30, followed by 120.50. On the downside, support begins at 120.30 and 120, followed by 119.70. Additional floors are eyed at 119.50, backed by and 119.

At 12:00 AM Japan November Leading Economic Index (exp 20.0, prev 54.5) At 4:30 AM Germany November Manufacturing Production m/m (exp 0.3%, prev –0.4%) Germany November Manufacturing Production y/y (exp 2.3%, prev 2.5%) Germany November Industrial Production m/m (exp 0.3%, prev –0.8%) Germany November Industrial Production y/y (exp 0.4%, prev 0.6%) At 5:00 AM Eurozone Q3 GDP q/q (exp 0.5%, prev 0.5%) Eurozone Q3 GDP y/y (exp 2.7%, prev 2.7%) At 7:00 AM Bank of England Monetary Policy Decision (exp 5.0%, prev 5.0%) At 7:45 AM ECB Monetary Policy Decision (exp 3.5%, prev 3.5%) At 8:30 AM US Weekly Jobless Claims (exp 325k, prev 329k) At 8:30 AM ECB President Trichet Speaks At 6:50 PM Japan December Board Liquidity (exp n/f, prev 1.9%) Japan December Money Supply M2+CD (exp 0.8%, prev 0.7%)

The dollar remains firm across the board, holding steady near its highest levels since late November against the euro around 1.2930. The recent upturn in US economic reports have resulted in an overall reassessment in Fed policy, with many not expecting the FOMC to shift its stance until the second half of 2007. Interestingly, the sharp pullback in oil prices will further alleviate trade imbalances and inflationary pressure in the US, as evidenced with yesterday’s shrinking US deficit figure.

Euro Recoups Ahead of ECB

The ECB will likely leave rates unchanged at 3.50% when it announces its monetary policy decision later in the session at 12:45 GMT (7:45 AM New York time). In anticipation of a Q1 rate hike, Bank President Trichet is expected to signal ‘strong vigilance’ against inflationary pressure, thereby laying the foundation for additional policy tightening in either February or March. The impact of such an announcement in the currency market will likely be tempered since further ECB rate hikes have already been priced in and much of the focus remaining on FOMC policy direction. Nevertheless, we expect some support for the euro as it attempts to form a base around the 1.29-level versus the dollar.

Economic data from Germany remains in focus as well, with the releases of manufacturing production and industrial production slated for later in the session. Manufacturing production on a monthly basis is forecasted to improve from the previous month’s 0.4% decline, rising 0.3%. Industrial production is also expected to reverse a decline of 0.8% from the prior month, improving to 0.3% for November. Eurozone Q3 GDP is also due out, with consensus estimates calling for unchanged readings from both the previous quarter and year at 0.5% and 2.7%, respectively.

The euro edged up off its multi-month lows versus the dollar near 1.2930, with interim resistance seen at 1.2970, followed by 1.30 and 1.3030. Additional gains will target subsequent ceilings at 1.3065, backed by 1.31 and 1.3150. On the downside, support will start at 1.2930, followed by 1.29 and 1.2860. Further selling will target 1.2820, backed by 1.28 and 1.2760.

The dollar gained across the board after US trade deficit unexpectedly narrowed to the smallest level since July 2005. The trade deficit fell to 58.2 billion in November from 58.8 billion a month earlier, beating the estimate of 59.5 billion. The dollar strengthened more than 50 pips to 1.2935 versus the euro, and rose up to 119.76 from 119.30 against the yen.

Federal Reserve Chicago President Michael Moskow said today his major concern remains the risks to the inflation outlook. He added that resource pressures or other facotrs could prevent actual inflation from falling in a timely fashion. His view echoes Fed Vice Chairman Kohn's comment made yesterday that it is too early for the officials to relax on price pressures. The market has cut expectations on a Fed rate cut as early as this March. Interest-rate futures pricing shows traders see only a 6% chance the Fed will lower rates in its March policy meeting.

The European Central Bank and Bank of England are expected to keep interest rates unchanged at 3.5% and 5.0% respectively on policy meeting. The market will focus on the ECB chairman Trichet's comments on the economy and rate outlook after decision announcement tomorrow morning.

EURUSD will face interim resistance at 1.2950, followed by 1.2980 and 1.30. Additional ceilings will emerge at 1.3020, backed by 1.3050. Support starts at 1.2930, backed by 1.29, 1.2870 and 1.2850. Subsequent floors are eyed at 1.28.


Yen Stay Under Pressure Ahead of Leading Index

The Bank of Japan Chief Economist Hayakawa said that consumer spending has picked up and will continue to increase in the longer term. The yen briefly rose on his hawkish comments.

It is expected that the Bank of Japan will raise rates from 0.25% to 0.5%in next week's policy meeting. However, the yen still stays under pressure as carry trading prevails. The market will look to Japan's November leading economic index due tonight for more insights on Japan's economy outlook. The index is forecasted to drop from 54.5 to 20.

USDJPY encounters interim resistance at 119.75, backed by 120 and 120.30. Subsequent ceilings will emerge at 120.50, followed by 120.80. On the downside, support begins at 119.15 and 119, followed by 118.70. Additional floors are eyed at 118.50, backed by and 118.

At 4:30 AM UK November Trade Deficit (exp –4.125-bln sterling, prev –3.918-bln sterling) At 8:30 AM Canada November Trade Balance (exp n/f, prev C$3.8) US November Trade Balance (exp -$59.5-bln, prev -$58.9-bln)

The dollar gained further ground against the majors in early Wednesday trading, rising to 1.2955 versus the euro and 1.9345 against the sterling. With the lack of fresh indicators in recent sessions, the greenback has continued to ride the coattails of traders reevaluating when the Fed may shift from its current hawkish bias. Economic data from the US for the session ahead will see the November trade deficit, which is forecasted to expand further to $59.5-billion, up from $58.9-billion from the previous month.

Barring any significant upward surprises, the dollar is expected to maintain its buoyant tone throughout the week ahead of Friday’s retail sales and business inventories data. Markets are still attempting to determine whether there has been any spillover from housing and manufacturing into other sectors of the economy, particularly consumption demand. With US retailers reporting soft sales from the holiday season, the December retail sales may be vulnerable to downside risks. Consensus forecast is for the headline figure to fall to 0.7% from November at 1.0%, while the excluding automobiles retail sales are seen down to 0.6% from 1.1% from the prior month.

Euro Pressured on USD Strength

The euro continues to struggle versus the dollar, trading near multi-month lows around 1.2955. A bout of upbeat Germany economic data failed to prop the single currency higher, thereby highlighting that the focus among currency traders is not sentiment over Eurozone trends but rather sentiment over the US economy and subsequently, the timing of Fed policy. We’ll continue to digest further news from the Eurozone this week, namely the ECB policy announcement on Thursday and the press conference from Bank President Trichet.

Although the Bank is not seen raising rates from 3.50% this Thursday, markets will pay close attention to the subsequent press conference from ECB President Trichet for clues on the timing of additional policy tightening. Given the Bank's policy of transparency any Q1 rate hike will likely be communicated at this week's press conference. Given the current driving forces behind recent FX moves, the impact of Trichet suggesting additional policy tightening in the coming months will likely be tempered due to markets’ attention fixated on US economic trends and Fed policy.