Dollar rallies across the board but the absence of a clear driver could drain momentum

US Dollar:

The dollar posted its biggest rally in five weeks through Thursday’s session. This has ushered the currency what many speculators would agree could be the verge of a meaningful reversal against a number of its counterparts. A quick rundown of the list of liquid majors gives us a good sense of what is at stake. EURUSD has dropped back to the floor of the past three weeks’ congestion at 1.3550 and could finally retrace more of that aggressive, January rally. GBPUSD has similarly settled back towards 1.60, leading many to wonder whether its five-week and nearly 1,000-point run will finally crack. USDJPY and USDCHF enjoyed their biggest rally in three weeks in a move that transcends the risk-appetite debate. And, even AUDUSD has stumbled back to the market-friendly and psychologically influential parity level. After a terrible performance for the greenback for January, the currency looks poised to make its recovery. The only concern is where this sudden strength originated.
DATA: Trade balance and Prelim UoM consumer sentiment

Pound:

As economic activity unexpectedly contracts in the fourth-quarter, there could be a growing split within the MPC as the fundamental outlook for the U.K. remains clouded with high uncertainty, and the committee may look to preserve its wait-and-see approach throughout the first-half of 2011 as it aims to balance the risks for the region. As the GBP/USD narrowly maintains the upward trend from the previous month, the pound-dollar may push higher going into the end of the week, but the small rebound in the exchange rate could be short-lived as risk aversion flows back into the currency market. How would the efficient market theory hypothesis explain the pound’s rally after the Bank of England’s policy meeting passed without a tangible change? The truth of the mat¬ter is that speculation plays a far larger role in guiding the capital markets than simple economic theorem allows for. For the rate decision Thursday morning, the reality that rates were held, the bond purchasing program was unchanged and there would be no clear explanation as to the group’s reasoning tells perceptive fundamental traders something. On the one hand, very few people would be disappointed that the central bank didn’t move immediately on raised inflation pressures and forecasts. On the other, there is material relief that the unex¬pected 0.5 percent drop in the UK economy through the fourth quarter didn’t necessitate an increase in the stimulus program. There was volatility Thursday but real action is seen next week with the quarterly inflation report, labour statistics and confidence figures.
DATA: PPI Input

Euro:

The ECB was forced to step into the government bond market as yields on Portuguese debt jump follow¬ing a fresh wave of fears that the country will be forced to seek international aid. The central bank jumped into the bond market for the first time in three weeks as 10-year debt on Portugal jumped to a euro zone high of 7.63%, ending the temporary suspension of the ECB bond-buying program that was starting in the middle of January.
DATA: No major data to be released today

General:
The employment data was big-ticket event risk for the Aussie dollar; but the immediate reaction was limited. Given time, the masses would eventually look beyond the headline figures to see the disappointment in the re¬port; the real driver for the day wasn’t on the docket. Looking at CS overnight index swaps, the 12 month yield outlook plunged the most in two weeks while two-year Treasuries yields suffered a similar fate.

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