• Has the EUR/USD Reached a Bottom?
• Dollar Tumbles as Fed Members Warn About Going too Far With Rates
• Pound Rallies as Gas Prices Hit Record Highs

US Dollar
The dollar is rolling over and as always, it is the Fed's fault.  The market was already reeling from the hawkish comments from ECB officials over the past few days and today, the sell-off in the dollar deepened when some Federal Reserve members warned against going too far with rates during their November 1st meeting.  The Fed also believes that the rate language has to be changed before long, even though they think that inflationary risks are still prevalent and that the economy continues to perform well post Hurricane.  We do not expect these debates to deter the Fed from raising rates in December and January, but we do expect changes to the FOMC statement that will make it much more neutral.  According to Bloomberg, after the release of the FOMC minutes, the probability of an April rate hike to 4.75 percent fell from 58 percent to 34 percent.  Oil prices are also back on the rise with a cold snap hitting the Northeast.  We knew that it wouldn't be long before oil prices begin to climb.  There is even word that we could see some snow over the Thanksgiving holiday.  The Conference Board reported today that they expect a weaker holiday season compared to last year.  With energy companies having already announced price increases for the winter season, we think that the average consumer may think twice about handing out Sony PSPs and iPods this Christmas.  Tomorrow tends to be a shortened trading day with most dealers leaving after lunchtime in NY.  We are already beginning to see what could become a renewed uptrend in December.  Yesterday, we talked about how 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.  This will be a point that we repeat many times over since fundamentals are right now aligning with the EUR/USD's historical bias in the month of December. 

Euro
The Euro is turning as we are seeing signs of a true bottom.  Not only are we seeing higher lows and higher highs technically, but sentiment as measured by the FXCM Speculative Sentiment Index has also flipped to net short, which signals a rally in the EURUSD.  On top of that, fundamentals are beginning to favor the Euro, albeit modestly.  The ECB is getting ready to begin raising interest rates while the Fed is beginning to contemplate slowing down their rate hikes.  Although the trajectory of rates for both countries is still positive, the expectations that the Fed might pause or even stop a few months down the line has the markets worried that thee premium that they have put on the dollar recently may not be completely warranted.  Only two pieces of data were released from the Eurozone this morning.  The second release of third quarter GDP for Germany was unchanged, confirming 0.6 percent growth in the quarter. The French consumer spending report however took a sharp dive, falling unexpectedly for the second consecutive month by 0.6 percent.  This is quite concerning as growth in the Europe's third largest economy begins to falter.  For the ECB to truly commit to driving rates much higher, Germany cannot be the only country that is improving. 

British Pound
The British pound has finally managed to muster a somewhat respectable rally thanks to broad dollar weakness.  Sterling traders continue to struggle with predicting what the Bank of England may do next.  Today's batch of news / data releases does little to clarify the picture, instead it makes reading the crystal ball even more difficult.  The CBI industrial trends survey for the month of November remained unchanged at -25.  The market had actually expected an improvement to -22, which is mildly disappointing.  On the flip side, gas prices in the UK surged to record highs due to colder weather.  For the time being, the BoE is still expected to remain on hold in December, but focus will be turned to tomorrow's Bank of England Monetary Policy Meeting minutes.  It will be interesting to see whether the vote to keep rates unchanged last month was unanimous.  If there are dissenters, it could shed some more light into what the central bank may do next.

Japanese Yen
The Japanese Yen strengthened against the dollar as the currency pair struggles to break the psychologically important 120.00 level.  The only pieces of economic data released overnight were the tertiary industry index and the all industry activity index * both of which came in weaker than expected.  They reversed some of the gains that we saw back in August and suggest that spending on the service sector may not be as buoyant as the market may have initially expected.  For the most part, the benign data is in line with recent concerns that the Japanese economy is stalling.  The stock market however continues to rally, with the Nikkei having only recently breached the 14,500 level.  Japanese markets are closed tonight for holiday, which means that trading in USD/JPY should be even more quite as the US markets end early.  On a side note, Yen traders are somewhat disappointed by the lack of new advancements on the Chinese revaluation front.  There were hopes that China may revalue their currency once again either ahead of or during President Bush's visit last week.  As we all know by now, that did not happen. Nevertheless, another move needs to happen; it is just a matter of when.

Kathy Lien is the Chief Currency Strategist at FXCM.