The EURUSD fell for the first time in three days as major reports showed the U.S. Producer Price Index increased more than forecast in March and the Euro Zone's ZEW survey showed weakness in German economic sentiment. In a minor yet still important report, New York State manufacturing unexpectedly expanded this month.

The size of the PPI increase led financial futures traders at the Chicago Board of Trade to reduce the size of their long positions. Traders had been anticipating as much as a 50 basis point cut by the Federal Reserve at its next meeting on April 30. The percentage of traders betting on a 50 bp cut dropped from 42 percent to 30 percent.

The focus comes back to interest rates. If the ECB is leaving rates alone and the Fed is only expected to cut rates by 25 bp then the slight premium built into the Euro in anticipation of a greater cut had to come out of the market on Tuesday. This led to the sell-off in the Euro. The news out of the Euro Zone regarding a drop in German confidence led to more selling pressure.

Although the trend has not turned down yet, the Euro seems vulnerable to the downside especially if todays reports indicate more strength in the U.S. economy. On Wednesday the U.S. is set to report the Consumer Price Index for March, Housing Starts, Building Permits, Industrial Production, Capacity Utilization and the Fed Beige Book.

Given the Fed's fear of igniting inflation through an aggressive campaign of interest rate cuts, Tuesday's report was very significant. The key is Wednesday's reports, however, because any surprise strength may be an indication of a developing trend. The ECB, on the other hand, has to be a little concerned at the ZEW report. Analysts had been anticipating for a while that there would be a slowdown in German exports and this report may be a sign that Euro Zone producers are beginning to feel the effects of a weak Dollar.

Inflation with Weak Housing May Compound U.K. Problems

The Royal Institution of Chartered Surveyors' measure of sentiment in the U.K. housing market fell to its lowest level in March since it began tracking the data in 1978. Consumer prices also rose at a slower rate than forecast. This news, even after Monday's surprisingly strong British producer price report, is sending out sell signals. Bearish GBPUSD traders had been aggressively shorting the Pound because of the weak housing sector, but Mondays surprise number forced a massive short-covering rally that did not change the trend. Tuesday's bearish report all but solidifies another round of rate cuts, maybe starting as soon as May.

Stronger Dollar Likely to Keep Pressure on Swiss and Yen

The strong U.S. Dollar helped firm the stock market on Tuesday. The recent string of poor earnings reports had weakened the USDCHF and USDJPY as traders sold Dollars after liquidating losing stock positions. A firm Dollar on Wednesday driven by a stronger-than-expected CPI report may ignite a strong rally in stocks. This would then trigger a buying spree in USDCHF and USDJPY.

Mixed Fundamentals Keep Canadian at Par