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USD

Friday was a day full of flings for the USD, which ended the day only a little weaker against most counterparts after glimpsing a daily range of 110 pips vs. the EUR, 170 pips vs. the GBP, and 120 pips vs. the JPY. Although initially strengthening all across the board on the back of some positive economic releases coming from the US, the dollar later sold off in a sharp knee jerk reaction induced by an announcement by the US Department of Commence on new tariffs that are going to be imposed on glossy paper imports from China.

Both US Personal Income and Personal Spending rose 0.6% MoM in February, doubling market expectations which stood on 0.3%, while the Core PCE (Personal Consumption Expenditure) Index, one pf the Fed's favorable measures of inflation exceeded consensus expectations of 0.2% MoM increase and released at 0.3%. On a yearly basis, the Core PCE Index rose to 2.4% in February from 2.2% in January, moving further higher from the Fed's target rate of 2%. The stronger than expected Personal Income and Spending figures, a long with the higher core inflation readings, sent the EURUSD to test the 1.33 support and the GBPUSD to 1.9550. The USDJPY, a pair which is not unfamiliar with volatility recently, edged as high as 118.37. The USD did not manage to hold on to these gains as traders started to digest these numbers- on an inflation adjusted rate, Personal Income has actually slowed while Personal Spending has increased. This means consumers spend more than they earn - which is actually a national hobby if we consider the US huge external debt.

It took a while before the Chicago Purchasing Managers Index released at a beating expectations 61.7 figure, on consensus forecasts of 49.5. Construction Spending also beat expectations of a 0.6% decrease and printed a 0.3% monthly increase. Although a slightly weaker than expected University of Michigan Consumer Sentiment offset these positive releases, the USD made another attempt against its major counterparts that lasted until the announcement on the new tariffs by the Department of Commerce.

The US Department of Commerce announced its decision to impose tariffs on paper imports from China. Allegedly, this move is intended to protect US manufacturers from their Chinese competitors which are being subsidized by their government in order to assist them to compete well in foreign markets. The US government has long pledged the Chinese government to avoid actions that induce imbalances in international trade, including fixing the Yuan exchange rate against the USD. Given the relatively small proportion paper imports constitute of the overall trade deficit the US has with China, it seems to us that this was a signal sent by the US government to its Chinese counterpart to start taking things into their own hands. This is basically why the dollar sold off so dramatically - because there are two possible contingencies to this move: Either the Chinese government decides to ignore the pleadings of the US government, in which case there are more trade sanctions to come, or the People's Bank of China will start to diversify its Foreign Exchange reserves away from the USD to other major currencies. Both scenarios are dollar negative, and markets, realizing this, reacted by a dollar sell off.

Today's calendar brings us the ISM Manufacturing index, which is expected to deteriorate to 51.3 from a previous 52.3 reading. Although this Friday's Chicago PMI painted a more optimistic picture regarding today's manufacturing PMI, the regional manufacturing surveys that were released two weeks earlier had sharply fallen from their previous readings, a fact that does not allow us to be more optimistic about today's ISM. Although a stronger than expected ISM reading is likely to buoy the dollar, market participants are likely to pay closer attention to the breakdown of the report, which's employment component serves as a good leading indicator for this Friday's Non Farm Payroll report. Should this component reveal signs of weakness in the US labor market, we might see traders reposition their USD long exposures.

EUR

Most Euro Zone economic releases came inline with or better than expectations, providing the single currency with the strength it required to hold above the 1.33 level despite the strong US data that came later. German Retail Sales increased 0.9% MoM on expectations of a 0.5% increase and Consumer Confidence released at -4 on expectations of -5. These two pieces of data provide further evidence that the Euro Zone economy is performing well in spite of recent monetary tightening by the ECB. Most EUR gains, however, were only later achieved on the back of the US announcement on the tariffs it is going to impose on Chinese imports. In case China chooses to retaliate by diversifying their foreign exchange reserves away from the dollar, the EUR is most likely to be the greatest beneficiary.

Both German Manufacturing PMI and Euro Zone PMI are scheduled for release this morning, and are not expected to considerably change in either direction from the previous month's reading. Lately, we have received good economic indicator readings from the Euro Zone, which allows us to estimate that it will require a significantly off-expectations EZ PMI in order to impair the EUR-positive sentiment. On positive readings, the EUR is most likely to continue range trading above 1.33 against the USD, and possibly strengthen against other pairs.

JPY

It has been a negative night for the JPY during the Asian session, as we saw several weak numbers coming from Japan. The Tankan large manufacturers index measures the general business conditions of large manufacturers, came out a bit weaker than expected at 23 after an expectations of 24. The Vehicle Sales Y/Y also came out weaker than expected -8.3% at -12.6%. The data released has put the Japanese Economic recovery in perspective, and proved that although an improvement is in place, there are still many boundaries along the way. The drop in consumer prices on Friday strengthens the notion that the economy is entering a local deflationary mode, which will give the Bank of Japan yet another reason to keep interest rates unchanged. It remains to be seen if this is a local weakness or just a bump along the way.

Technical Analysis

EUR/USD

A choppy session for the pair overnight, as the price bottomed out at 1.3290 and then spiked back to 1.3400. The daily charts give are giving mixed signals with a slight bullish signal indicating that the uptrend is still in place. Hourlies are a bit overbought creating a bias to buy on dips.

GBP/USD

The pair is testing the 1.9700 levels after a sharp spike of almost 150 pips. The daily charts are bullish, with a very strong resistance at 1.9750. The hourlies are mildly overbought, and slowly unwinding to neutral levels. Preferable strategy would probably be look for shorts on the 1.9725/50 levels.

USD/JPY

Intraday studies are mildly neutral and clear range trading is expected from the pair.

The direction of this pair is clearly up establishing a channel on the 4H chart with support at 116.41 and resistance at 118.32.

USD/CHF

Indicators are quite neutral on the 4H chart; however a bearish flag is established and offers a breakout of the support level which is located at 1.2121.

A preferable strategy might be to go short on this pair when the CHF is expected to strengthen while the next significant barrier is located at 1.2105.

Wild Card

GBP/NZD

The pair has been going down constantly for almost 8 months, and established a very stable downtrend. Oscillators show that the momentum is still very high, and that the hourlies are unwinding from oversold territories which give forex traders a great opportunity to jump into a very strong short.

Market Trend

	EUR/USD	GBP/USD	USD/JPY	USD/CHF	AUD/USD	EUR/GBP
Daily Trend
Weekly Trend
Resistance	1.3456	1.9906	120.56	1.2348	0.8171	0.6865
	1.3408	1.9826	119.33	1.2253	0.8110	0.6837
	1.3370	1.9745	118.30	1.2200	0.8079	0.6807
Support	1.3306	1.9626	116.83	1.2110	0.8040	0.6757
	1.3255	1.9545	116.03	1.2040	0.8008	0.6726
	1.3205	1.9426	115.43	1.2000	0.7958	0.6690

Indicators

Date	Time GMT	$€£¥	Event	Period	Prev.	Forecast	Imp
02/04/07	14:00	USD	ISM Manufacturing Index	Mar(M/M)	52.3	51.3
02/04/07	14:00	USD	ISM Manufacturing Prices	Mar(M/M)	59.0	60.0
02/04/07	16:30	USD	St. Louis Fed President Poole Speaks	Mar
02/04/07	23:50	JPY	Construction Spending	Feb (M/M)	-21.1%	-22.0%