• Dollar Rally Stalls Ahead of Trade Data
• Rate Debate Continues in UK
• Yen Holds onto Losses on Falling Confidence

US Dollar
After three consecutive days of gains, we primarily saw profit taking in the dollar today ahead of what will probably be the two most exciting days in the currency market this week.  With an empty economic calendar today, the market had banked its hopes on Fed speak, and even though Greenspan's words shook yields up a bit, it did little for the US dollar.  Both Greenspan and Fed President Bies continued to warn about "speculative excesses" in the market but none of this is really a dramatic shift in stance for a committee that has been hawkish since June 2004.  Between tomorrow and Friday, there are a lot of very important US data scheduled for release with the US trade deficit taking center stage first. The market expects the deficit to widen from -$57.9B to -$59.5B in August, just shy of the -$60.2B low hit back in February.   With oil prices hitting all time highs and up 17 percent in the month of August, the risk is for a larger than expected deficit.  At bare minimum petroleum imports should be higher than the previous month, but judging from the trend in port shipments, imports from China have also been picking up at a briskly pace.  Taking a look at the country's own monthly trade report, their surplus was over $10B in August, up from $7.5B in September.  Growing demand for Chinese imports and higher energy prices could push the deficit to a new record high, which if it is the case could push the EUR/USD back towards 1.2150.   More realistically though, any gains off of a weaker number could be limited as the market remains hesitant ahead of Friday's consumer prices, retail sales and industrial production numbers.  

Euro
Today's rally did little to help clear the thousand-ton weight hanging over the euro at this point.  Germany's harmonized consumer inflation index was revised down on an annualized basis from 2.7 percent to 2.6 percent.  This still leaves the inflation rate solidly above the European Central Bank's 2 percent pain threshold, justifying the central bank President's staunchly hawkish stance.  Furthermore, it did not take long for politics in Germany to come back to the forefront.  Even though it has been agreed that Merkel will be assuming the post as the next Chancellor of Germany next month, the "grand coalition" is already facing its first stumbling block.  Schroeder's SPD party, which is suppose to stake claim on the majority of the ministerial positions in the new government are already fighting amongst themselves about how the seats will actually be allocated within its in own party.  If infighting is already happening within a group that is already use to working together, it remains to be seen how much infighting will be happening between two groups that may see each other as arch enemies.  Any infighting will diminish the speed by which the new government can bring reforms to the country.  

British Pound
The great rate debate churns on as earnings growth and unemployment data was released during the session.  Rising 4 percent, according to the office of National Statistics, earnings continue to increase at an easing pace, the lowest rate in nearly a year and a half.  Subsequently, the claimant count remained steady at 2.8 percent, while unemployment change rose for the eighth consecutive month.  This poses further directionless bias in the U.K. economy.  On one hand, slowly rising wage costs may comfort policy makers, as earlier concerns existed over the contributions to overall inflationary pressures in a tight labor market.  However, on the other, unemployment is rising in the region, especially as the manufacturing sector has shed about a 3 percent difference on the annualized comparison.  Ultimately, what is apparent is that there may be some room for policy makers to wiggle in an additional rate cut consideration, as inflationary pressures, in line with earlier comments by Governor Mervyn King, seem to remain temporary.  Granted that energy prices may not abate any time soon given the winter season, inherent wage cost declines may offer that final push that policy makers need to accommodate to continually weak demand.

Japanese Yen
Bucking the trend of recently optimistic data in the world's second largest economy, consumer confidence dipped for the second consecutive month in six.  According to the Cabinet Office, consumers weighed down by higher energy prices remained less optimistic of the near term future, wages and employment conditions.  What's notable is the fact that the drop keeps the reading below the key expansionary 50 level and can be suggestive of waning consumer demand in the near term.  However, countering the notion have been recent increases in retail sales and household consumption.  Previously a major concern, as both contribute tremendously to overall economic growth, both factors have increased during their respective months.  As a result, the current confidence reading may be taken with a grain of salt as the report looks to be lagging overall optimism.  Moreover, with both declining surveys taken in months leading up to the parliamentary elections, the politically intense environment may have contributed more than current economic factors.  With that said, market participants are now looking to tomorrow's inflationary data in lending further underlying yen strength.  Producer prices, slated for release, should be reflective of higher energy costs.   However, any continued signs of persistent deflation will add to current indecision in the underlying spot.

Kathy Lien is the Chief Currency Strategist at FXCM.