The dollar rallied sharply against the majors at the start of the week as traders focused on US economic reports released in the morning, breaking through the 106-level versus the yen. Propping the greenback higher today was an unexpectedly stronger report on pending home sales, prompting speculation that the struggling US housing market may be bottoming. Pending home sales for April surged to 6.3%, far exceeding estimates for an improvement to -0.5% from -1.0% a month earlier.

Key highlights from the US economic calendar include the April trade balance, June consumer sentiment, the Fed's Beige Book, retail sales, business inventories, and May CPI. Markets will focus closely on the US trade deficit and gauge the impact of soaring energy prices in recent months. Consensus estimates anticipate the deficit to expand to $60.0 billion, up from $58.21 billion from March. Retail sales are seen reversing the 0.2% decline in April, rising by 0.4%. Meanwhile, core retail sales are expected to remain unchanged at 0.5%.

The greenback also found support from US Treasury Secretary Paulson and NY Fed President Geithner, who both left open the option for central bank intervention. Nonetheless, we interpret the risk for government intervention in the currency market to prop up the dollar to be minimal, particularly given its staunch criticism of China's currency regime.

Sterling Buoyed by Data

The pound extended last week's gains touching the 1.98-level against the dollar and edging up to 0.7920 versus the euro early in the New York morning. The gains were sparked by UK inflation data released overnight which further tempered expectations for the Bank of England to cut interest rates over the coming months. The May core PPI output rose to 1.2%, beating expectations for a decline to 0.4%, from 1.0% in April. The annualized core PPI output reading surged to 5.9%, versus 4.5% in the previous year. Meanwhile, input prices climbed to 3.9% m/m and 27.6% y/y.

The week ahead will see several key reports including April manufacturing production, industrial production, trade balance, unemployment, and the June RICS housing survey.