The US dollar ended last week on a very strong note Friday with the EUR/USD pair collapsing 3 big figures in one session, testing a key psychological level of 150. The pair has now fallen over 500 pips from the beginning of the ECB press conference that began at 8:30am EST Thursday morning. Jean Claude Trichet, head of the ECB, finally indicated surprise at the pace of economic slowdown in the Euro Zone.

This change of rhetoric was enough send Bund Yields lower and send the EUR down sharply against most of its major trading partners. The economic data that came out last week from the Euro Zone, in particular Italian GDP posting a decline of .3%, was anything but good. Italy is the 4th biggest economy in the Euro Zone from a GDP perspective. With Italy turning negative on the GDP side it is now only a matter of time until France and Germany follow suit. German factory orders are plummeting and investor confidence is falling quite precipitously in the Euro Region.

Should oil continue its sharp decline and inflation expectations start to fall, it would only be a matter of time before the European Central Bank start to lower interest rates. Given that the ECB's single mandate is to contain inflation this could still take some time, possibly at the beginning of 2009. Debt markets are now pricing in no rate moves by the ECB and will soon be priced for rate cuts. Should the demand side of the equation start to become a factor as Global economies continue their slowdown and Oil continue its slide, the EUR could be in some big trouble against a host of currencies it has been outperforming for all of 2008. This trend of EUR strength could finally be coming to a close.

This is not to say the the US economy is about to take off or that house prices in the US are going to start to surge higher. Quite the contrary. The US economy is going to keep deteriorating just at a much slower pace as the rest of the World from these levels. There are still many wild cards to the recovery in the US. Job growth could stay negative, the election in the US and other categories of asset backed securities might need to start to be written down by US financial institutions. The US financial system though has taken huge writedowns in relation to mortgage backed securities, something its European counterparts have not. Can you say catchup? Absolutely! Over the course of the next several months we should start to see more significant writedowns from the likes of Australian, European and UK Banks, Hedgefunds, etc. This should mean continued USD strength.

There are some major headwinds from the US side of the equation though. For one, weekly jobless claims have now been over 400k for over a month. This should mean the next non-farm payroll data should be an abomination! Many in the market place have only been talking about sub prime mortgage asset write downs. Last I checked there were many other classes of debt that could be vulnerable to a slowdown in job creation, layoffs and consumer spending. Commercial loans, Auto loans, Home Equity Lines Of Credit or HELOC to name just a few. Last week Morgan Stanley reduced or out and out cancelled a large percentage of its customers HELOC. Should this trend continue we could see the US consumer cut off from its most important asset. The ability to spend on credit! Last week we saw pending home sales surge 5.3%. This on the surface sounds like a great number. Pending home sales does not mean a closed sale though. In order to close a purchase of a home one would need a mortgage to do so!! Most in the US do not pay cash for a home, they apply and usually get approved for a mortgage. One problem, banks in the US are becoming tighter and tighter with the funds they loan. Only the most credit worthy are getting approved. Of course you could always put 50% down! How many Americans can do that? This should mean many of these pending home sales will not close. Given all the government intervention and bailouts over the past 6 months however, the housing market in the US should not collapse. House prices will come down and probably 10 to 15% over then next few years but the voracity and pace of the decline has surely abated. The case I am trying to make is that the US is going to do quite poorly but the European Economy, because rates have been too high for too long, could collapse.

There are many market commentators that say job losses are a lagging indicator and that when they finally peak it should mean that the end of the recession is upon us. Certainly when one looks at past recessions this was the case. Problem is what happened in the US was an unprecedented rise in home prices which in my opinion will lead to an unprecedented slowdown in jobs and growth in the US. Additional writedowns in various asset backed securities could lead to the other proverbial shoe to drop for the US economy. One area that could cause such a leg down is the commercial real estate market and the loans that will need to be rolled over in the months and years ahead. Shopping centers are a good example of such rollovers. Many shopping center developers have built centers on short term financing at very low interest rates. When a developer builds a center with a loan that will need to be re paid in 2 to 5 years, this developer had assumed it would be easy to re-finance this loan or roll it over. Over then next year or more many of these loans will need to be rolled over into more long term loans. The problem will be that many developers will not have sufficient rent rolls to qualify for the same low interest loans they assumed they would get. In addition, many shopping centers will just not qualify as terms, credit worthiness and formulas have all changed in the last year. There will just not be enough money to go around and there are many of these that will need to be rolled! Important to note that this is not an impending problem, this should be the theme for 2009. Banks should be safe until then! So while the case for the USD looks good for now, 2009 could see the USD plunge to new lows, especially if the ECB does the right thing and lower rates quickly and sharply should growth and inflation expectations drop together.

With all that said, which currency will out perform and how do we make money this week!? One could make still make the case for the USD to continue its accent, though we are getting a bit overbought and are approaching major resistance on the USD index or DXY at the 76.20 level. Should that level be taken out to the upside and given that the EUR/USD pair has already broken to the downside a year long uptrend at the 155.50 level(see chart below) we could be headed to another longer term channel line and Fib retracement level at the 143.50 zone. The Fibonacci level I a referring too is the 38.2 % retracement from the 11/11/05 lows of around 116.75 to the recent all time high of 160.41. 143.50 also represents a 10% decline from the highs. Seems like the perfect spot! Are we going to go there in a straight line like last week? Seems highly unlikely but one thing does look clear, we are in momoland! So much for the summer range bound trading!! With that being said I could easily see a turn around Tuesday scenario as we have a tremendous amount of economic data due out this week in addition to the reasons stated above.

Oil and Gold should also be a factor as there seems to be a larger than normal correlation between commodities and the USD at the present moment. Given that the Iranian situation is not getting better, the Russians are now at war with the Israeli backed Georgian's, Oil looks like it could have a sharp bounce should it reach my $110 target. Will it get there by Tuesday? That could be a stretch but should it get there and reverse that would be a great indicator that for the moment the USD rally has come to a close.

The UK has a deluge of market moving data this week. Should this data be better than expected one could see the GBP rally not just against the USD but against many other currencies it has fallen against over the past year. The EUR/GBP looks quite vulnerable under .7800. Other numbers that will be of major interest will be US retail sales on Wednesday as well as EUR GDP and CPI Thursday. Should retail sales be weaker and judging by Walmarts disappointing numbers last week they will be, one could easily see the USD sell off on that number. Given that Italy had a GDP number that fell off a cliff, one could easily see a disaster number on Thursday's EUR GDP number. So what does one do when the US and EUR are having weak data? Trade the crosses! The EUR/CAD, EUR/JPY, EUR/GBP, EUR/CHF all look very very weak. Time, technicals and the economic data will tell all! One thing does look for certain, the ECB will not be raising rates for quite some time.

Jamie Saettele is a Technical Currency Analyst for FXCM.