EUR/USD Weekly Outlook 5/11 thru 5/16 2008

If you've been enjoying the volatility and price swings of the past few weeks, you're in a for another treat... this week nearly every key piece of fundamental data is directly tied into Fed and ECB interest rate and monetary policy... I'm talking connected-at-the-hip type stuff such as:

*U.S. and Eurozone consumer inflation data
*U.S. and Eurozone production and manufacturing data
*U.S. retail sales data
*U.S. housing data
*Foreign investment and foreign imported inflation data

Plus, Trichet and a bunch of goons from the Fed will be out in force on the speaker's circuit talking about monetary policy, economic outlooks, housing, credit, etc.

Tomorrow the only real key even is a speech by Trichet during mid-morning NY session, so we'll want to keep close watch on what Trichet has to say.

EUR/USD:

The euro starts the week off in a precarious position... last week it failed at 1.5600 and proceeded to take a nose dive... then the euro managed to crawl its way back up only to fail at 1.5500 and is under a touch of downside pressure here at the start of the week.

This is exactly why I've been shorting the rises on the euro the past three weeks because of it's repeated inability to make higher highs, because of it's very visible lack of momentum to hold any ground at the top of the range, and of course because of the shifting fundamental situation in the U.S. and Eurozone.

It's my opinion that the bulk of the attention this week will be put on the CPI data. The way the scenarios could play out are very simple although not very easy to predict...

Hotter than expected Core CPI would prove to be very USD+. Weaker than expected Eurozone CPI would prove to be very EUR-. It's really that simple... if Eurozone CPI prints as expected I do not believe it will give the EUR much of an upside boost because it would just mean the ECB will stay on the same path and will say the same things they've been saying.

Now, at expected or weaker than expected U.S. CPI data could very easily put the dollar back under pressure against the euro. It's no secret inflation is stiffling in the U.S. Based on my research, on the low end, inflation is at least 4.00%. It's my own personal opinion that inflation is running at 7.00% or better. Of course, the Fed has not yet relented from the "no inflation" story.

The reason why at or weaker than expected U.S. CPI could hurt the dollar is because it would renew the market's belief that the Fed has room to cut rates another 25bps or more. I still believe the Fed is likely done cutting rates and that inflation should begin to take center stage, but obviously what I think and what the Fed thinks is usually on the opposite end of the spectrum.

Regardless, when the time does come that we see some truth in inflation data like CPI, Core CPI, PCE, Import Price Index, etc., it should give the dollar a needed boost.

I really don't have much more to add at this point... it's very early in the market, we have a ton of data on the books, and I don't expect any bigger moves before at least midnight EST.

Once Frankfurt and London open we'll have a much better idea of things and we'll get a much clearer read on the market.

I'm sitting tight and waiting to see how things play out over the next 8-12 hours... there are a lot of unknowns with this week's fundamentals but a high potential for volatility and price swings... I'm managing my risk very tightly... I'm not taking any knee-jerk trades...