What a week! The dollar bulls were clearly in control since Thursday, when Mr. Trichet indicated further rate hikes would not come into play for at least the next few months.

The two main events were the ECB rate decision and the non-farm payroll data from the US. The very fact we had these two releases at the same time on Thursday, made for difficult trading conditions and choppy trading was seen all across the board. EUR/USD made new weekly highs at 1.5910 minutes before the payroll data; however the -62000 job positions reported didnt have a negative impact for the dollar, as most traders feared the number was set to come out far worse than that. When Mr. Trichet started his speech, EUR/USD dived more than 100 points in a few minutes, as the bank failed to deliver more hopes for rate hikes, and Trichets comments were clear for now: these rates will stay unchanged. The combination of a not-so-bad NFP number, together with a negative Trichet, made the Euro very weak against the dollar which gave dollar bulls even more excuses to buy the greenback against all other currencies.

EUR/USD broke important support levels at 1.5725, then 1.5660 and after the market opening this morning printed 1.5610, where the Euro got bid at those levels. The sentiment in the pair seems to have changed into dollar positive, for no other reason but pure Euro weakness.

This week the economic calendar seems rather empty, however the important event of the week is Bernankes testimony in front of the House of Representatives on Thursday, where together with Paulson he will give views on the economic outlook and more insight on what the next move by the FED will be. Analysts suggest that after the recent comments by US officials that a strong dollar is needed, we might have further verbal intervention regarding dollar strength, as the oil is due for a correction too.

Today we have the beginning of the G8, where officials from the eight richest nations are gathering in Japan to speak about world economic outlook and high oil and food prices. It will be interesting to listen for more comments regarding FX rates and if the dollar is mentioned we may see further strength in the American currency. The fact inflationary pressures are getting higher is making world leaders a little uncomfortable and therefore the FED may consider increasing its rates more than once before the end of the year.

Other important data this week is the BOE rate decision which is expected to be unchanged, however the fact that economic data disappoints every day could lead to a rate cut as soon as this Thursday. We all heard from Kings testimony in front of Parliament that inflation is soaring and growth is slowing, making the banks job especially tough to balance the two in the coming days. The pound is very weak against all currencies at the moment, especially the greenback, and a clear break in GBP/USD of 1.9580-1.96 will give us 1.9480-1.95.

EUR/USD has been trading below 1.57 since late Friday and the pair is struggling to gain momentum; signaling further losses in the pair. 1.5580 now comes in to play as good support levels and a clear break will open way for 1.5520. A correction could occur in the pair today and tomorrow towards 1.5725 but shorts can be tried there for a continuation of the downward move. Only a break of 1.58 can alter the downside scenario.

The fact that EUR/USD set a new high last week of 1.59, made a lot of traders position themselves long for the euro with a scope of 1.60. Here is another example of how market chatter and rumors work in favor of the big players, who spread the negative sentiment minutes before Trichets speech in order to take all the stops and then we have a relief rally of at least 300 points in the opposite direction. My question is this: has anything changed fundamentally over the last few days to support this dollar rally? No, I dont think so. Data is still coming out negative for the dollar and oil is still hovering near record highs. We think the reason for the dollar strength has only to do with Trichets comments regarding rates and maybe some speculation that Bernanke may raise rates into the coming months. Also, the fact that many traders were long Euros and therefore got caught against the move on Thursday helped the dollar gain after EUR/USD liquidation took place.

Now, this week we will see if the dollar will keep up the good work and if Bernanke will paint us a nice picture of how the US economy performs. If his words are hawkish towards the economic outlook and high inflation, then the rally will continue for the greenback. Dont forget that DOW JONES reversed all losses on Friday after it found good support at the psychological 11000 level.

So, it will be a very interesting week and although the economic data is limited, the moves could be quite big if either the G8 provide some news of FX intervention or if Bernanke gives the markets what they want.