The large drop in the ZEW survey from 50 to 38.6 had little effect on EUR/USD tonight, as the market already anticipated the decline given the political chaos of German elections. The EUR/USD held steady at 1.2150 as all eyes were on today's 16:15 GMT FOMC rate decision. The market expects the Fed to raise rates once again by 25bp to 3.75%. Of more interest to the dealers will the tone of the accompanying statement. More specifically market participants will want to see if the Fed will address the ramifications of Katrina on US economy and whether it may hint at any pause in the near future.   

While, the European problems are well known to the market, some analysts have started to point out that US may soon face a chaos of its own. Although the physical and economic aftereffects of Katrina and the newly developing Rita have already curbed the strongest of dollar bullish sentiment, the greatest fear of dollar longs comes from the economic hurricane that could emanate from a rapidly deflating housing bubble. With consumer sentiment  falling to a 13 year low and homebuilder's index dropping to a 2 year low all indications point to the fact that housing demand is on the verge of a marked slowdown. Today's Housing Starts and Building Permits may offer further clues to this budding trend with both projected to be lower than the prior period.

Regardless of the results from today's data, one conclusion appears certain: Fed's relentless ratcheting of rates is having a depressive effect on housing demand. Inventory levels have risen and number of prospective buyer have declined. We have long warned that the Fed in its zeal to curb inflation may tip US into a recession by destroying the one major asset of the US consumer. Given that dynamic, the market may soon begin to worry more about the fragile state of the US economy rather than the disarray of European politics.

Boris Schlossberg is a Senior Currency Strategist at FXCM.