The path to a stronger euro appears to be through a weaker euro as evidenced by tonight's Italian Industrial Orders which rocketed up 5.6% on a year over year basis versus 3.8% expected. The gain was in no small part caused by the drop in the euro which in turn made Italian goods far more competitive in the global marketplace. We believe this dynamic will continue to reinforce itself, stimulating better than expected growth in the export driven Euro-zone which in turn will eventually translate to a firmer euro currency as the positive results roll in. As the result of the news, EUR/USD bounced back to 1.2050 after reaching a low of 1.2010 in the Asian session.

With Rita finally off the radar, market players will now stop playing amateur meteorologists and will likely refocus on the economic data. The calendar is relatively busy with Housing Data, Durable Goods and Chicago PMI ahead for US and IFO and German unemployment for the Euro-zone. Up to now the dollar rally has been built of twin pillars of rising interest rates and continued economic growth. But those assumptions will be sorely tested this week, especially with the Chicago PMI data which last month shocked the market by plunging to contractionary levels for the first time since 2003. Market expectations are for a rebound  but we believe the same currency dynamics that are beneficial for European manufacturers may be detrimental to their US counterparts as dollar strength saps much of their competitive advantage. That's why the possibility of another negative surprise is quite strong.  If, on the other hand Chicago PMI does rebound, the dollar bulls, much like the residents of Houston will have escaped a gloomy fate and the case for dollar bullishness will strengthen. 

Boris Schlossberg is a Senior Currency Strategist at FXCM.