A fresh bout of weak US economic data undermined the recent recovery in the dollar, pushing the currency beneath the 2-level against the sterling and falling past the 1.56-mark versus the euro. The reports revealed further deterioration in sentiment, with the Conference Board's index of consumer confidence plunging to its lowest level in 5-years at a reading of 64.5 in March, far exceeding the consensus estimate for a slip to 73.5 from 75.0 in February. The expectations component dropped to 47.9 - its worst reading in 24-years. The Richmond Fed services index fell to minus 5 in March down from 1 a month earlier.

The economic calendar for Wednesday consists of February durable goods orders, new home sales and building permits. Durable goods, typically a volatile, are seen reversing the 5.1% drop in January, estimated to rise by 0.8%. The excluding transports reading is forecast to improve to -0.3% versus -1.5%. Meanwhile, February new home sales are expected to slip to 580k units down slightly from 588k units a month earlier. Given the lingering weakness in the US economy, we continue to look for the FOMC to cut by 50-basis points at the Fed's next meeting at the end of April.

The euro benefited from US data reinforcing the need for further monetary easing from the FOMC to stimulate the ailing economy. Fed funds futures are currently pricing in a 34% probability for a 50-bp cut in April, in contrast to an ECB that continues to maintain its hawkish bias against the inflation. Traders will focus on ECB President Trichet's Parliamentary testimony in the coming session. Although he is largely anticipated to reiterate the Bank's emphasis on inflation, it will be interesting to see how aggressive his commentary will be against the strength of the euro.

Traders will look ahead to data, including Germany's March Ifo sentiment survey, Eurozone current account balance, net investment flows and industrial orders. Germany's Ifo current conditions index is expected to drift to 109.3, down from 110.3, while the expectations component is seen slipping to 97.8 versus 98.2. Industrial orders in January are estimated to reverse the sharp 3.6% decline in December, edging up by 0.3%, while improving to 3.9% compared with 2.1% a year earlier. The current account deficit is expected to narrow to 8.5 billion euros from 10.3 billion euros a month earlier in December.

Inflation