Daily FX
Euro Headed Towards 1.40?
Friday July 20, 4:38 pm ET
By Kathy Lien, Chief Strategist strategist@dailyfx.com

The Euro climbed to a new record high today, putting 1.40 within arm?s reach. Like the US, there was no major economic data released, which means that the move higher was solely driven by subprime related dollar weakness. The biggest question on the minds of Euro traders is whether this will matter for the European Central Bank, who will be meeting to discuss monetary policy in 2 weeks. Judging from the recent comments made by ECB President Trichet and his peers, it will not. Earlier this week, Trichet has warned European politicians that interference into their monetary policy decisions will be a breach of the EU treaty.

He may not want to talk down the Euro anytime soon because that may be misinterpreted as giving into political pressure. Furthermore, not only has ECB Garganas indicated that further rate hikes are likely, but this morning, Constancio said that they have no target for the exchange rate. Unlike back in December 2005, Germany, the Eurozone largest member country is better equipped to handle a stronger currency. Therefore if the ECB does step in to stop the Euro?s rise, it would certainly be a blow coming from the left field. Looking ahead, the most important pieces of data on the Eurozone calendar are EZ PMI, M3 and the German IFO survey. Steady or softer figures are expected all around. Meanwhile Swiss producer prices were much softer than the market expected in June, but this has not affected the value of the Franc. Next week, we are expecting the KoF report of leading indicators.

Daily FX
Carry Trades: Is this Profit Taking or Liquidation?
Friday July 20, 4:40 pm ET
By Kathy Lien, Chief Strategist strategist@dailyfx.com

Japanese Yen crosses or carry trades have sold off significantly today, raising the question of whether this is finally liquidation or just another bout of profit taking. The gap between Japanese and US bond yields has been narrowing with Japanese Yields holding steady and US yields selling off aggressively, which suggests that market sentiment has changed.

For USD/JPY we have seen weakness throughout the past week and further losses are of course contingent upon whether the problems in subprime become global. The degree of today?s move reminds us of the move that happened in early June which means that it could extend for a few more days next week. There is enough on the US and Japanese calendar next week to prove to us whether the markets have really turned. From Japan, we are expecting consumer prices and retail sales.

Daily FX
British Pound Hits New 26 Year High on Stronger GDP Growth and Dollar Weakness
Friday July 20, 4:42 pm ET
By Kathy Lien, Chief Strategist strategist@dailyfx.com

The British pound surged to a fresh 26 year high on the back of overall dollar weakness and stronger second quarter GDP growth. A rise in oil extraction in the North Sea provided an unexpected surprise to GDP growth. With the market so bullish British pounds to begin with, stronger growth will only give those looking for another rate hike greater confidence.

The futures curve is still pricing in 6 percent interest rates by the end of the year, but the question is whether this will come in the third or fourth quarter. Last weeks less hawkish minutes suggests the latter and unless we get some surprising comments from BoE officials, we will not get much more clarity next week. The only pieces of data on the UK economic calendar are house price reports and CBI Industrial trends survey.

Daily FX
Euro Hovers Near Its All-Time Highs
Tuesday July 17, 5:45 pm ET
By Kathy Lien, Chief Strategist strategist@dailyfx.com

Even though the Euro ended the day near its all-time highs, the currency pair?s inability to extend its rise suggests that it could be setting up for a much needed correction. Consumer price growth slowed last month from 0.2 percent to 0.1 percent in the Eurozone. This is the tenth straight month that CPI has remained below the central bank?s 2 percent target.

Although this is hardly a market moving number, if we do see stronger producer prices from the US tomorrow and hawkish comments from the Fed later this week, it could help to trigger a nice correction in the EUR/USD. Germany will be releasing the ZEW survey tomorrow. The market is looking for a firmer number, but given recent interest rate hikes, analyst sentiment could easily deteriorate. Switzerland will also be releasing retail sales. In general, growth has been strong and we expect domestic consumption to confirm that as well.

Daily FX
Canadian Dollar Hits New 30 Year High, New Zealand Dollar Advances to New 22 Year High
Tuesday July 17, 5:52 pm ET
By Kathy Lien, Chief Strategist strategist@dailyfx.com

After yesterday?s blockbuster gains, the Canadian and New Zealand dollar consolidated amidst the lack of any meaningful economic data. Canada has consumer prices and leading indicators due for release tomorrow morning.

The strong CAD is expected to drive inflation down, but the overall strength of the economy could limit any major slide. The Australian dollar pushed higher despite the smaller growth in exports in the month of June. The country is also releasing leading indicators tonight, but the data is never market moving because it dates back to May. Overall, the commodity currencies are continuing on their trends, but the moves are becoming exhausted. The sustainability of the rallies will be dependent upon how dollar bullish Bernanke will be tomorrow.

Daily FX
British Pound Comes Within a Whisker of 2.05
Tuesday July 17, 5:58 pm ET
By Kathy Lien, Chief Strategist strategist@dailyfx.com

The British pound climbed to another 26 year high after consumer and retail prices rose more than expected in the month of June. The annual pace of retail price growth increased from 4.3 to 4.4 percent, indicating that inflationary pressures are still a big problem in the UK.

This means not only could we be looking at 6 percent interest rates over the next few months, but more immediately, the price action in the British pound suggests that traders are looking for the minutes from the Bank of England meeting earlier this month to reveal a unanimous if not close to unanimous decision to raise interest rates. Anything short of 7 out of 9 votes in favor of a rate hike would be construed as dovish. The bigger risk is certainly to the downside given the extent of the recent rally. In addition to the minutes, we are also expecting the UK?s labor market report for the month of June. If wage growth slows as expected, 2.05 could be the peak in the GBP/USD.

EURUSD Pattern Indicates Potential For Sharp Reversal

Euro Ending Diagonal?- Japanese Yen Bearish (USDJPY Bullish) Above 120.97- British Pound Upside Potential Limited- Swiss Franc Corrects Gains (USDCHF Losses)- Canadian Dollar 1.0442 Key for Bears (USDCAD Bulls)- Australian Dollar Nearing .8700- New Zealand Dollar Bullish Above .7714

Commentary: 1.3800 held yesterday but the EURUSD could test that level again today before bearish potential comes to the forefront. We say this because the rally from 1.3731 may be tracing out an ending diagonal. If this is the pattern playing out, then we should see a spike through 1.3798 before a reversal. However, upside potential is limited compared to downside risk. It seems likely that we?ll see a decline backl towards the former 4th wave at 1.3568 next week. Coming under 1.3731 instills confidence in the near term bearish case. Strategy: Sell break of 1.3731, against swing high (currently 1.3798), target 1 is 1.3568, additional bearish potential below there

Commentary: We wrote yesterday that "the USDJPY bounce from 120.97 is still in 3 waves, but a rally through 122.52 would make the rally a 5 wave affair and strongly indicate that the entire decline from 124.13 was an a-b-c correction. Keep in mind that the longer term structure suggests that an A-B-C correction could extend to 128.00 before the larger reversal." The USDJPY pushed through 122.52 to make the rally from 120.97 5 waves, which sets the tone for additional gains. The decline so far has been corrective but additional support is at 121.83. A break above 124.13 is now the favored view, but 120.97 must hold in order to keep the bullish structure intact. Strategy: Bullish now, against 120.97, target a break above 124.13, target TBD

Bearish undertones continued to plague the US dollar during the New York session following rather lackluster US economic reports. Continuing on yesterday's momentum, the Euro remained higher against the greenback and traded at an all time high of $1.3810 in the morning, while declining against the British pound to the tune of $2.0365. Subsequently falling against the Japanese yen to below the 122.01 mark, the greenback was able to regain some support against the Canadian dollar after testing C$1.0450, the fourth gain in five sessions.

Dour news early in the New York morning helped to suppress dollar strength in the week's closing session as both US advance retail sales and consumer confidence numbers were slated for Friday. Worse than expected, US retail sales figures actually dipped on the month, far worse than expected by