What a week we had last week, with EUR/USD moving like a rollercoaster form 1.56 down to 1.5370 and then all the way back up to 1.5780 where it closed Friday night at New York.

The week started profitably for the greenback, following comments from Chairman Ben Bernanke that the US economy is getting stronger and inflation is at high levels, something which the bank doesn’t like and will do everything in its power to avoid. These comments were taken from the markets as a FED warning that interest rates won’t get any lower, but on the contrary the bank may raise them in the coming months. That alone was enough for the dollar bulls to take over once again and send the pair down towards 1.54. The better than expected ISM number showed more dollar strength and we saw EUR/USD breaking the important support of 1.54 and printing new lows for the week at 1.5360.

But, when we started saying that dollar is doing a comeback and more dollar strength is coming, Mr. Trichet came back with vengeance and took away the entire dollar’s recent progress. The European Central Bank left its key rates unchanged but in the press conference that took place after the decision, Trichet was more than hawkish and his words were so powerful and unexpected, the EUR/USD experienced a big push up towards 1.57. The pair skyrocketed from 1.5370 all the way up to 1.56 as markets were caught by surprise when Trichet not only indicated no cuts were in the bank’s plans, but a raise may come as early as next month. This is something that Mr. Trichet and his pals are not in a habit of doing and therefore was welcomed with euro buying all across the board. The fact that the bank said that it is in a state of heightened alertness, in combination with higher inflation and a need of raising rates drove the euro bulls to push the pair towards the recent highs.

There is a lot of speculation that goes around trader’s desks that Trichet planned his words very carefully regarding future interest rate hikes, in the time when euro was getting slammed all across the board due to dollar strength and bad euro zone economic data. Many say the ECB doesn’t want a weak euro and their plan is to make the European currency the strongest in the world. Whatever the case, one thing is for sure: after Trichet’s comments, it will be very difficult for dollar bulls to take control again and despite what Bernanke said about inflation, it will take more than a few comments to restore any confidence regarding the US economic recovery.

This week the economic calendar is lighter, however some important data is coming from the US and Europe. Let’s start with today’s data, first we have the UKs PPI, which will be closely watched by the markets in order to see if there are high inflationary pressures on the UK economy. The fact that last week the bank chose to leave rates unchanged does leave room for speculation that if the inflation data continues to print higher numbers, the banks job will become very difficult and stagflation maybe unavoidable. Let’s not forget that almost all economic data out of UK continues to disappoint, with housing market numbers getting lower every week.

The other news for today is from the US; pending home sales. The forecasts predict a slightly better number this month, but if the data disappoints, we may see further dollar weakness.

In the next coming days we have trade balance, retail sales and CPI data out of the US. All these will be monitored closely by the markets, especially the inflation data, for any indication of what FED will do in the next coming weeks. Let’s not forget a speech by Bernanke’s this week in Massachusetts regarding inflation which will be very interesting to hear.

Another factor for the dollar’s weakness can be found in the recent oil appreciation, which on Friday we saw a move of 11 dollars. The oil printed new record highs due to recent Trichet comments and other geopolitical reasons. Next target for the oil seems to be $150 per barrel and if dollar continues to be sold off we could see $150 sooner rather than later!

The EUR/USD broke important resistance levels and as long as it trades above 1.5450, it’s looking for further strength. Next resistance is at 1.5820 and a clear break puts 1.5860-70 as the next target for the pair. However, before the continuation of the move up, there may be a slight correction downwards to 1.57, as many euro bulls will want to take advantage of buying on dips.

The fact the DOW JONES printed big losses on Friday certainly put risk aversion back in the game, and therefore we could see some selling in all yen related pairs, with USD/JPY potentially breaking lower and GBP/JPY maybe a good sell opportunity at 209(a strong resistance level) for a move towards 205 I the next coming days. All that will depend on this week’s data and if there is further weakness in stocks.

Let’s see what this week will bring us and how the traders will react to the releases. The market sentiment is back to dollar negative, which may stay for a while, especially if the US data continues to disappoint. Also, it will be wise to monitor the oil moves this week, as the correlation of EUR/USD to oil is very close and if the latter starts to correct from recent new highs, it will weigh on EUR/USDs recent strength…