The dollar continued to appreciate against the euro for the sixth straight week as dialogue from Fed Chairman Ben Bernanke insisted that incessant U.S. economic growth might require monetary tightening to limit inflation. U.S. wholesale prices increased in January by 0.3 percent, not including food and fuel. This increase reinforces the possibility inflation will strengthen, and thus provide a need by the Fed to counter it. Interest rate futures reveal a 25 basis point increase is all but assured for the March 28 meeting.

Technicals reveal the euro-dollar trading within the multi-month channel (see below) with the 100dma currently providing adequate upside resistance to the single pair at 1.1945. Strong downside support is slated at 1.1670. The dollar-yen continues its ascension as Japan continues to fight deflation, however, BOJ Deputy Governor Kazumasa cites that prices are beginning to gain and Japan’s economy continues to recover at a steady pace. Traders will keep their eyes on the next consumer price report released later this month for another increase in prices as it would be the third monthly price increase in a row. That would raise optimism that Japan is nearing the end of deflation and thus the BoJ could seek to end their zero-rate policy. Short term interest rate differentials continue to be an integral part of foreign currency dynamics. Our current dollar-yen target is 121.00 if the 118.95 level is penetrated.

ClockworkFX's Daily Forex Insight - February 17, 2006

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