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- Japanese Yen Gains as US Consumer Sentiment Improves
- Euro Breaks Below 1.3100 as ECB's Trichet Signals Rate Cuts
- British Pound Under 1.4850 Ahead of UK GDP Results
- Australian Dollar Dominates, New Zealand and Canadian Dollars Under Pressure as CPI Reflects Easing Price Pressures

US Dollar Index Tests Monthly Highs, Japanese Yen Gains as US Consumer Sentiment Improves
The greenback and Japanese yen were two of the strongest majors on Friday, but the US dollar index was not able to break above its monthly highs near 86.00. US economic data was better than expected, as the preliminary reading of the Reuters/University of Michigan consumer confidence index jumped to 61.9 for the month of April from 57.3, marking the second straight improvement. A breakdown of the index shows that sentiment on both current conditions and the economic outlook improved during the survey period to 66.6 from 63.3 and 58.9 from 53.5, respectively. Meanwhile, inflation expectations for the year ahead surged to 3.0 percent from 2.0 percent, while expectations for five-years ahead rose to 2.7 percent from 2.6 percent. These moves suggest that consumers aren't remotely concerned about the prospect of deflation, something that we've said could become a risk toward the end of 2009 and 2010. That said, if demand continues to contract going forward, prices for consumer goods are likely to fall further, and these changes could eventually impact sentiment.

Looking ahead to next week, there will really only be one key US economic indicator released and the news may add to signs that domestic demand has yet to recover as US Durable Goods Orders are forecasted to have dropped 1.5 percent in March and even excluding transportation is anticipated to fall 1.2 percent. All told, this would mark a return to disappointing results after the index surprisingly rose 3.5 percent in February, and while this will have the most impact on forex trading, the markets should keep an eye on non-defense capital goods orders excluding aircraft, as this number serves as a leading indicator for business investment. The 3-month annualized figure has fallen sharply over the past few months, and combined with the weak outlook for the headline reading, the news could weigh on risk appetite and subsequently provide a boost to the US dollar, thanks to increased flight-to-quality.

Related Article: US Economic Data Weighs on Risk Appetite

Euro Breaks Below 1.3100 as ECB's Trichet Signals Rate Cuts, British Pound Under 1.4850 Ahead of UK GDP Results
The euro and British pound both lost ground to the US dollar once again, with EUR/USD pushing below 1.3100 and GBP/USD breaking below 1.4850. However, only the former had any fundamental factors driving price action, as European Central Bank (ECB) President Jean-Claude Trichet confirmed that the central bank sees the need for further rate cuts and additional measures, such as quantitative easing. When combined with all of the dovish comments we've heard from other ECB members over the past week along with bearish economic data, it's easy to see why the markets are considering the potential for at least one more 25 basis point cut by the central bank. The latest data showed that the Euro-zone trade deficit narrowed to 2 billion from 10.9 billion, as imports declined faster than exports, but ultimately, the export-reliant region continues to see foreign demand weaken.

Similarly bearish news is likely to be released from the UK next week, as the advanced reading of Q1 GDP for the nation is forecasted to contract for the third straight quarter at a rate of -1.5 percent, the worst drop in nearly 29 years, which could drag the year-over-year rate down to match the Q1 1981 low of -3.8 percent. The UK has been hit particularly hard by the credit crunch, especially since the country became one of the biggest financial centers in the world. This has translated into a full-on collapse of the housing market, climbing job losses, and weak consumption. Furthermore, with growth slowing around the world, demand for British exports has declined as well, putting a large burden on manufacturers. Overall, a greater-than-expected decline could lead the British pound lower as the data would raise the odds that the Bank of England will expand their quantitative easing efforts. On the other hand, if GDP is a bit better than forecasts, the currency could surge.

Australian Dollar Dominates, New Zealand and Canadian Dollars Under Pressure as CPI Reflects Easing Price Pressures
The Australian dollar proved to be the strongest of the majors on Friday, but the other commodity dollars - the New Zealand dollar and Canadian dollar - ended on a mixed note as they rose against the European currencies but slumped versus the US dollar, Japanese yen, and Aussie. Meanwhile, economic reports from New Zealand and Canada were far from bullish as they reflected easing price pressures. New Zealand consumer prices rose 0.3 percent during Q1, as expected, which brought the annual rate back into the upper end of the Reserve Bank of New Zealand's target range of 1-3 percent. Likewise, Canadian CPI rose a slight 0.2 percent in March, leading the annual rate down more than anticipated to 1.2 percent from 1.4 percent. On the other hand, the Bank of Canada's (BoC) core CPI measure actually accelerated to an annualized pace of 2.0 percent from 1.9 percent, suggesting that outside of food and energy costs, consumer prices have yet to fall sharply. As a result, the BoC is increasingly likely to leave rates unchanged at 0.50 percent next week.

Next week, Australia's headline consumer price index is forecasted to have risen 0.5 percent during Q1, bringing the annual rate down to a more than one-year low of 2.8 percent from 3.7 percent. However, after the Reserve Bank of Australia surprisingly cut their cash rate target by 25 basis points to 3.00 percent, RBA Governor Glenn Stevens said that inflation over the medium term is likely to be lower than it has been over the past two years, suggesting these Q1 results could actually reflect a much more significant slowdown in price growth. That said, Stevens' policy statement also indicated that the RBA may leave rates unchanged going forward as the current stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead. All told, if we start to see consumer price growth fall below the RBA's 2-3 percent target range, the news could weigh on the Australian dollar. However, if inflation pressures prove to be stronger than anticipated, the currency could actually rise.

Related Articles: New Zealand Dollar/US Dollar Monthly Forecast, US Dollar/Canadian Dollar Monthly Forecast

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Written by: Terri Belkas, Currency Strategist for