• December Could Bring Big Moves in the Dollar
• Euro Slides as ECB Trichet Clarify Comments
• Signs of Housing Market Stabilization Does Little For Pound

US Dollar
The holiday season is upon us and for traders. This means that liquidity in the markets could begin to dry up.  In terms of price action, we could see one of two things * either we remain trapped in a 1.1640 * 1.1900 trading range for the EUR/USD or we have an extended and broad movement driven by a few key players.  Last year, we saw trading volume gradually decline in the month of December as most traders sat on the sidelines preferring to watch the EUR/USD hit a high of 1.3667 than to participate in it.  There was one brief upsurge in volume on the Wednesday before the New Year but a good portion of that was squared the following night.  In times such as these, we usually see a few big players use this opportunity to induce some strong moves in the market.  Interestingly enough over the past 5 years, aside from 2001, we saw pretty big trending moves in the month of December, all dollar negative and Euro positive.  The move from the beginning of the month to the end of the month (December) in 2000 was over 600 pips, in 2001 was approximately 110 pips, in 2002 and 2003, the move was over 450 pips and in 2004, the EUR/USD rallied 280 pips.  Although past performance is never 100 percent indicative of future results, if history can be reliable, then we expect another big move with minimal retracements this December.  There are plenty of catalysts in the weeks ahead, but for the time being, this should be a quiet and shortened trading week due to the Thanksgiving holiday here in the US.  Leading indicators released this morning was slightly stronger than expected, rising 0.9 percent, compared to the market's forecast for 0.8 percent growth.  Comments by Chicago Fed President Moskow were of mild interest.  As a well known hawk, Moskow reiterated his belief that more policy accommodation needs to be removed and that rates may even need to be raised beyond the neutral level.  Judging from the price action, although the EUR/USD wants to turn, dollar strength remains dominant, which means that any rally could be met with fierce resistance.

Euro
For once, we are seeing the Euro dictate the direction of trading in the world's most liquid currency pair.  ECB President Trichet has stolen the limelight from the Fed as he signals to the market that December may be the first time the ECB will move on rates in close to 2.5 years. Last Friday, the Euro shot higher as Trichet couldn't be clearer to the markets by outrightly saying that he is ready for a rate hike.  The central bank thinks that inflationary pressures is so strong at the moment that they need to act now and cannot wait until next year.  Today, however the EUR/USD has given back some of its gains as the central bank attempted to play down rate hike expectations.  Trichet was on the wires once again, saying that a rate hike now does not mean that the central bank will follow up with a series of rate hikes.  Clearly, they still want to hold onto the stimulative effects that the weaker Euro is bringing to the region's economy.  In our opinion, yield reigns king and even though the ECB is not expected to follow in the US' footsteps with their own cycle of aggressive rate hikes, their first step to bridging or improving the yield gap between the US and Europe could stall the currency pair's descent. 

British Pound
Despite some encouraging housing market data released this morning, the British pound still lost ground against the dollar.  Pound sentiment is so heavily weighted to the downside that nothing seems to be good enough to attract bulls back into the market.  With the interest differential against the dollar growing smaller and smaller with each passing month from both directions, it will take a lot to actually get the pound back on its feet.  The Office of the Deputy Prime Minister reported today that house prices rose 3.3 percent year over year, up from 2.8 percent reported in August.  The Rightmove house price survey also reported rising home prices for the second consecutive month.  Gradual signs that the housing market may actually be stabilizing is reinforcing our view that still prevalent inflationary pressures should encourage the Bank of England to leave interest rates on hold next month.  This should be extremely positive for the EUR/GBP, which will benefit from ECB's rate hike while at the same time not having to worry about any growing interest rate differentials in the pound's favor.  In fact, at this juncture, if the BoE were to make a move, the bias is still for another rate cut. 

Japanese Yen
The dollar continues to remain very well supported against the Japanese Yen as it hangs around the 119 level.  Recent comments from the Bank of Japan have shifted the market's expectations ever so slightly * from anticipating a rate hike next year to a delayed one at best.  After leaving interest rates unchanged last week, BoJ Fukui confirmed that they have no intention of raising interest rates until consumer prices consistently register positive readings.  Like the EUR/GBP, EUR/JPY should benefit from the same shift in interest rate expectations.  Both the BoJ and BoE feel no rush to move rates, while at the same time, the ECB feels an interestingly strong rush to raise interest rates before the year end.  As we mentioned in the Euro section, interest rates reign king and this will continue to dictate the yen's direction.

Kathy Lien is the Chief Currency Strategist at FXCM.