Bad News Leads to More Dollar Weakness
The US dollar continued to weaken after news that the help wanted index dropped from 22 to 21 in the month of November and new homes sales fell to 12 year lows. Any hope for a housing market recovery has been eradicated by today’s release as the steep decline points to the lack of buyers. Prospective homeowners are holding out until they see a bottom which is certainly not healthy for a market that desperately needs buyers. Interestingly enough, the median price of a new home actually rose $10,000 while inventories dropped. Still, the data suggests that the housing downturn is not over. On Monday, we are expecting existing home sales which should reconfirm the overall vulnerability of that sector. Chicago PMI was also released today and even though the index bucked the trend of other manufacturing reports by jumping from 52.9 to 56.6, the dollar failed to budge in the minutes following the release as traders held off for the new home sales report. In the week ahead, bond markets have an early close on Monday and all financial markets are closed on Tuesday. However this does not mean that it will be a week without volatility. It would actually be very surprising if that became the case because we have a lot of important US data due for release including existing home sales, manufacturing and service sector ISM and non-farm payrolls. Conditions in the labor market are expected to deteriorate because of a rise in jobless claims and a drop in the employment component of the Chicago PMI and Philly Fed indexes.

Euro Continues to Rise, Breaching 1.47
For the sixth consecutive trading session, the Euro extended its rise against the US dollar. Economic data continues to be strong with final third quarter GDP growth in France revised up from 0.7 to 0.8 percent. Eurozone retail PMI also strengthened in the month of December despite a sharp drop in the latest retail sales report. ECB officials have not given up on their hawkish rhetoric. Stark was the latest central banker to remind traders of the significant inflation dangers that lie ahead. He warned that even though inflation is set to ease in the coming year, the sustained upward pressure of commodity prices poses upside risks. The message that they want to deliver to the markets is that if inflation does pick up, the ECB will not hesitate to raise rates. These comments may be in response to the preliminary data on German consumer prices for the month of December. Contrary to the market’s forecast, CPI did not rise this month. Meanwhile the Swiss Franc is stronger across the board despite weaker economic data which tells us that the rally in the currency is largely due to flight to safety. These numbers should do little to alter the Swiss National Bank’s plans to raise interest rates. In the week ahead, the main releases out of the Eurozone are manufacturing PMI and German unemployment. Both releases are expected to be Euro negative. Switzerland on the other hand will be releasing manufacturing PMI and consumer prices.

British Pound Falls to Record Low Against Euro
The British pound fell to a record low against the Euro. Since the middle of the month when the Bank of England released minutes that were more dovish than the market was anticipating, the pound has been on a one way downtrend against the Euro and Swiss franc. Over the past 4 months, EUR/GBP which has traditionally been a more range-bound currency pair has really taken on a life of its own. This is a testament to the impact of interest rates on currencies because the monetary policy biases of the European Central Bank and the Bank of England have been the main drivers of EUR/GBP strength. Nationwide house prices were also released this morning. Even though the British pound is weaker across the board, the sell-off was not triggered by the larger drop in house prices. The average price of a home in the UK is now the lowest since 2006. The housing market is a big problem for the UK economy and we expect it to remain a focus next week with mortgage approvals and construction PMI due for release. In addition to that, we are also expecting the manufacturing and service sector PMI reports.

Divergent Performance in the Commodity Currencies
The commodity currencies behaved very differently today with the Australian and Canadian dollars falling against the greenback but the New Zealand dollar rising against it. The only piece of economic data released from any of these 3 countries is New Zealand money supply which was actually weaker than expected. Commodity prices do not explain the move since gold prices increased over $10 while oil prices fell. In the week ahead, we do not have any New Zealand economic data, but we are expecting Australian manufacturing and service sector PMI along with Canadian raw material prices and IVEY PMI.

Japanese Yen Crosses Tumble as Dow Erases Earlier Gains
The Japanese yen crosses or carry trades are all weaker today as the Dow erases its early morning gains. Stocks continued to suffer on the back of troubles in the housing market and lingering concern about the turmoil in Pakistan. There were a lot of Japanese economic data released last night and on balance, they were more yen positive than negative. Core consumer prices on a national level were stronger than expected along with the unemployment rate and retail sales. Industrial production and earnings also fell less than expected. The only piece of data that was yen bearish is the industrial production report. In the week ahead, expect the Dow to continue to drive movements in the Japanese yen as there are no Japanese economic data on the calendar.

Kathy Lien is the Chief Currency Strategist at FXCM.