Here are the top 3 things that could affect how currencies trade this week in order of importance:

1. U.S. Retail Sales Report

The most important event risk this week is the U.S. retail sales report. Concerns about the sustainability of the U.S. recovery and the degree of consumer spending has been one of the main reasons why investors have turned against the dollar. The market’s focus has shifted from the balance sheet problems in Europe to the disappointments in U.S. data. Recent reports show the housing market has taken a turn for the worse while manufacturing and service activity have slowed. Private sector payrolls continue to grow but the economy as a whole has returned to net job losses. Consumer spending is the missing link to this whole puzzle and if American consumers are still spending, then these worries are overdone. However if consumers cut spending for the second month in a row, like the market expects, then the dollar could be headed for big trouble.

2. Chinese Economic Data

Although this weekend’s trade numbers from China did not have a big impact on the forex markets, the rest of the data due this week are important enough to trigger a meaningful reaction in the market. Second quarter GDP, inflation, retail sales and industrial production are amongst the economic reports scheduled for release. Based upon the consensus forecasts, analysts expect the Chinese recovery to slow. If they correct, we could see the data trigger a wave of risk aversion and the weaker the numbers, the more significant the sell-off. However if the data surprises to the upside and they certainly could after the strong export numbers, we could see the rally in the forex market resume. The risk appetite in the financial markets this week is as dependent on Chinese data as it is on U.S. economic data.

3. Earnings Releases

The earnings season kicks off this evening with reports from Alcoa. According to a Wall Street Journal article, analysts believe the largest U.S. companies will post a 19.3 percent yoy increase in per share profits this quarter. Given the strength of the dollar in the second quarter, which can hurt the profitability of multinational U.S. companies, these projections may be overly optimistic. If Yum Brands, Google or General Electric and other companies reporting this week warn about the impact of FX fluctuations on earnings, it could strip away some of the optimism. JPMorgan, Bank of America and Citigroup are also amongst the big names reporting week and how the corporate sector has performed could affect how USD/JPY and other currencies trade.

Kathy Lien is Director of Currency Research at GFT, and runs KathyLien.com.