US Dollar Faces Nasty Mix of News on Tuesday
The US dollar did nothing but consolidate last week’s losses on Monday, as the markets remained quiet on the Memorial Day holiday in the US. However, volatility could return in a big way on Tuesday as a spate of US economic releases are likely to signal one thing: conditions remain awful. Indeed, at 9:00 EDT, the S&P/Case-Schiller index of home prices is likely to fall sharply for the fifth consecutive quarter in Q1. Later in the morning at 10:00 EDT, new home sales are expected to fall 0.6 percent to 523K while the Conference Board’s consumer confidence index is forecasted to fall to a nearly 15-year low of 60.0 from 62.3, which won’t be entirely surprising as rocketing food and energy prices combined with the collapse of the US housing sector and tightening credit conditions have sparked widespread pessimism throughout the financial markets. Furthermore, the labor markets have started to deteriorate as evidenced by the slow gains in the unemployment rate in recent months, and things are only expected to get worse.

Euro: Will the German Economy Remain the Engine of Euro-zone Growth?
The euro started out the week on a more subdued note, as lackluster volumes left the currency to range trade. Given the extent of last week’s gains, the EUR/USD may simply continue to consolidate throughout the week. Nevertheless, it will be worth watching the bevy of German economic indicators scheduled to be released as they will likely continue to reflect one thing: Germany remains the powerhouse of the Euro-zone. First, the final reading of German Q1 GDP is not expected to reveal any major revisions, and will likely confirm that growth in Europe's largest economy accelerated to the fastest pace in 12 years. Furthermore, a breakdown of the index is anticipated to show a jump in domestic demand, exports, and construction investment. This news will be followed up by German labor market data for the month of May on Thursday morning, which is expected to show its 28th consecutive month of improvement as the unemployment change is forecasted to fall by 25,000. Moreover, the unemployment rate is expected to ease to a nearly 16-year low of 7.8 percent.

British Pound: Will the Focus Shift Away from Inflation to the UK Economic Slowdown?
The British pound’s substantial gains last week were primarily the result of the hawkish commentary contained in the minutes from the Bank of England’s policy meeting in May. However, the forex markets have a notoriously short-term memory, and traders could rapidly go from pondering the implications of an inflation-focused Monetary Policy Committee to weighing the risks associated with the sharp slowdown in the UK housing sector. In fact, BBA mortgage approvals on Tuesday and Nationwide house prices on Thursday are both expected to reflect waning demand for residential homes in the UK. Furthermore, GfK consumer confidence is anticipated to drop even lower to a nearly 26-year low of -25. While the Bank of England is unlikely to budge from their hawkish stance given rapid acceleration in inflation growth and persistant upside risks, the clear deterioration in economic activity in the UK may start to appear frighteningly similar to that of the US, and this sentiment could start to weigh on the British pound.

Commodity Dollars: NZ Trade Deficit Widens Despite Spike in Exports to Record High
The New Zealand trade deficit widened far more than expected during the month of April, as the balance tumbled to –NZ$334.1 million versus forecasts of a reading of -$150 million. However, a breakdown of the balance shows that imports were responsible for this move, as the balance jumped to NZ$4.13 billion. The gain was due primarily to one-time purchases related to the exploration of oil fields, as this led to the includsion of an oil platform and production vessel worth a combined NZ$477 million. Meanwhile, exports surged to a record high of NZ$3.795 billion on the back of rocketing prices for dairy products. Nevertheless, the New Zealand dollar barely registered a response to the news, as trade in all of the commodity dollars – including the Australian and Canadian dollars – proved lackluster. Given the subdued trading in the commodity markets amidst the US holliday and broad lack of economic indicators scheduled to be released this week, the currencies may continue to see quiet price action. Nevertheless, Canadian dollar traders need to beware of volatility on Friday, as expansion in Canada is anticipated to grow at the slowest pace in nearly five years. Q1 GDP is forecasted to hit a tepid 0.4 percent, down from 0.8 percent in Q4 2007. The culprit? The sharp economic slowdown in the US. As a massive importer of foreign goods, the health of the US economy tends to be important for most exporting countries. However, the US is the biggest importer of Canadian goods, making the health of the Canadian economy particularly dependent on their southern neighbor.

Fate of USDJPY Tied to Movements in the Dow
Lately, the fate of USD/JPY has been tied to the movements in the Dow, but since US stock markets were closed on Monday, price action in the pair has essentially grinded to a halt. Recent sell-offs in US stocks helped the Yen last week, and where the currency goes from here will likely remain contingent upon risk trends. On the economic calendar are the retail sales, jobless rate, consumer prices and industrial production reports.  

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Written by Terri Belkas, Currency Analyst for DailyFX.com