• Little Reaction to Today's Reports
• Dollar Traders Wait for CPI and TIC
• Euro Rallies on Stronger Growth Reports
• Pound Weakens on Softer Inflation Reports

US Dollar
Today we sat in front row seats for the opening act to tomorrow's US economic releases.  We saw the market budge little on the back of the day's mixed economic data as it waits for tomorrow's more telling reports.  Retail sales and the Empire State manufacturing survey both came in stronger than expected, but the producer price report was mixed. Spending fell a less than expected 0.1 percent in the month of October as slower sales of automobiles and the lower price of gasoline dragged down the receipts of retailers.  Excluding automobile purchases, retail sales actually increased 0.9 percent.  The Empire State Manufacturing survey also leaped to 22.8 from 12.1 against the market's expectation for a mild improvement to 15.5.  The bad news however lied in the producer price report, which saw core prices fall 0.3 percent in the month of October.  Even though headline prices were exceptionally strong, the weakening of core prices has always been concerning for dollar bulls.  The market generally waits for the release of the consumer price report before making any definitive opinions.  Judging from today's numbers, headline CPI is set for another strong rise while core consumer prices face the risk of being unchanged from the previous month.  Net foreign security purchases will also face close scrutiny.  After last Friday's shockingly wide trade deficit, traders will be looking for comfort that foreigners continue to plug the deficit by snapping up dollar denominated assets.  The previous month, foreign inflows hit $91.3 billion, which was the strongest amount in 16 months.  This month, with interest rates still headed upwards, flows are expected to reach $70 billion.  If this proves to be the case, it would only further confirm our notion that the trade deficit, for the time being is a worry of the past.  Meanwhile, comments by incoming Fed Chairman Ben Bernanke were of mild interest today.  He strived to reassure the markets that he would carry on Greenspan's interest rate policies and would move toward more openness in the Fed.  He still favors inflation targeting, which will probably be one of his tactics for increasing transparency.  Bernanke also spent some time criticizing China's foreign exchange policy, which puts him in line with the Bush Administration's overall view on China. 

Euro
The Euro rallied as the region reported stronger growth numbers for the third quarter.  Led by the expansion in Germany, both Eurozone and German growth accelerated by 0.6 percent in the three months ending September.   The stronger release has the market raving on about a possible rate hike in December, as hinted by the ECB.  We still believe that the likelihood for this is low because even though the overall growth number was impressive, consumer spending still remains weak.  The ZEW survey of analyst sentiment also came in much weaker than expected, falling to 38.7 from 39.4.  The market had actually expected the index to accelerate to 44.0.   The worry is mostly in Germany as the Eurozone ZEW survey actually improved more than the market anticipated from 34.7 to 40.0.  With Germany, even though softer oil prices and a weaker Euro were stimulative for the economy, it only did so much as offset the weaker domestic demand. In our opinion though, the stronger external demand should eventually filter into stronger domestic demand and if that is so, we may be cusp of a real turnaround in growth. 

British Pound
The British pound saw a good deal of fluctuation throughout the day.  Even though the dollar lost ground against most of the other majors, it held onto its gains against the pound.  Softer inflation numbers has the market concerned that the BoE may be leaning further away from a rate hike and closer to a rate cut.  The consumer price index and retail price index numbers for October unexpectedly dropped across the board on lower oil prices during the month.  Annual CPI dropped to 2.3 percent from 2.5 percent in September.  Annual RPI dropped to 2.5 percent from 2.7 percent.  Even core CPI came down to 1.6 percent from 1.7.  Although less inflation seems to be healthy for the economy, traders focused more on the negative impact this will have on interest rates.  Lower inflation takes the pressure off the Bank of England to raise rates and will actually allow them to strongly consider lowering the rate again to spur economic growth.

Japanese Yen
The Japanese yen broke above the 119.00 level overnight but failed to hold onto most of its gains as the US session wore on.  Japan released four pieces of data this morning even though none managed to have a significant impact on yen trading.  Tokyo condominium sales in October rose 8.9 percent over last year's figure, a drop from September's 16.2 percent gain, but still showing strength in the housing market.  Bankruptcies rose by 4.1 percent during October, the third rise in 5 months following 33 consecutive months of falls.    The leading economic indicators index fell, in line with expectations, to 45.5 percent from 50 percent in August.  The coincident index also fell to 50 percent from 55.6 percent the month prior.  These numbers may indicate that the heavy recovery seen in the Japanese economy may be hitting a bit of a slowdown.  Traders for the most part ignored this news, concentrating more on the movement of the dollar, as the Bank of Japan is not expected to stray from its ultra-loose monetary policy in its meeting tomorrow or anytime in the very near future.  The country seems to be growing strongly and moving away from the deflation it has faced for 7 years but the more faltering economic data that is released, the longer the Bank of Japan will have to wait to change their monetary policy and raise rates.

Kathy Lien is the Chief Currency Strategist at FXCM.