The markets were generally quiet today after the initial shock to the markets from soft US price data. More indicative of real inflationary pressures is the CPI, which is scheduled for tomorrow at 8:30 a.m ET. The market is looking for a reading of 0.4% increase month over month, and a 0.3% increase, less food and energy. It's my opinion that anything relatively close to expectations will see further dollar selling. I am by no means a fundamental analyst, but what I am seeing based on recent price action is that the market is just looking for an excuse to sell dollars. So anything as expected, or perhaps 0.1% above expectations, will likely see dollars lower by the end of the day.

So with that being said, those of you who are still short USD/JPY from last night there is a slight change of plan since this morning. Book profits on a piece of your short position here and move your stop to breakeven on the rest, because we're looking take that last piece way downtown.

Or, if you missed the entry last night, don't worry because I cooked up a second entry for you. For tonight, look to get short a half position at 116.15 and the second at 116.35, with stops out at 116.55. Or, if you can handle the risk, it's preferable to stop out of half at 116.55 and the other half above the New York highs at 116.75.

We're going to try to carry this position into tomorrowââ,¬â"¢s number, because as I mentioned, anything lower than analyst's estimates will see immediate dollar selling and anything as expected might see a brief Dollar rally followed then by selling.

Confused about what relationship PPI and CPI have with foreign exchange rates? Well CPI and PPI are broad measures of the rate of change of price levels in the consumer and producer area of the economy. If price levels are generally increasing, the economy is performing well as evident by increasing demand for goods and services. In other words we are experiencing inflation, which is a great fear of our Federal Reserve Board. Inflation erodes the value of today's dollar as compared to tomorrow's dollar, so as a result, a lender must demand a higher interest rate to ensure his principle is fully recouped at end of the loan term. So what happens is the Fed Chairman, Ben Bernanke, will increase the overnight borrowing rates to make it more expensive for the booming economy to continue with its trend of rapid consumption, thus cooling the economy, which also stabilizes price levels.

So, again, how does it relate to FX?  Well, if the Fed is increasing interest rates to stem inflation, the rate of return of other US fixed income investment vehicles is also increasing, which then strengthens the US dollar. So, while a country is raising interest rates, money typically flows towards that country supporting the local currency. Or, if rates are heading lower, or at least not going any higher, money will likely flow away from that country to a better rate of return, such as what we have right now in the US.

Circling back, if tomorrow's price data comes in weaker than expected, or as expected, the markets will look for one more move higher by the Fed, if they are not already done. This means the highest return on fixed investments has already been seen in the US, so those holders of our investment vehicles could look to sell that vehicle, along with the Dollars that were required to purchase it.

Todd Gordon is a Technical Currency Strategist and Fund Trader with GAIN Capital Group.

Disclaimer
The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.