Euro retreated off the stop-fueled highs set in the Asian session to trade around the 1.1800 figure in early European dealing today. The economic backdrop for the Euro-zone was actually rather positive with Italian Consumer confidence hitting a 3 year high while EZ Industrial Orders rose a respectable 1.1% vs. 0.9% consensus estimates.
Nevertheless the rise in the euro may have been a  case of too much too soon, as the unit verticalized nearly 170  points in a matter of 12 hours yesterday after the release of FOMC minutes which indicated that some members were becoming concerned about the impact of rising rates on the US economy. The currency market interpreted the statement as the signal for the end of the rate tightening cycle and traders promptly started liquidating their dollar longs. Yet the reaction in the FX market may be a bit premature. US economic growth continues to impress for the time being with consumer spending  remaining strong.

The key to near term Fed policy will be the upcoming Christmas season. Should sales meet or beat the industry's robust expectations (yesterday the National Retail Foundation raised their holiday forecast to a 6.0% year over year gain from 5.0% previous estimate) 5% US rates are not out of the question and in that case the dollar bull run will likely to continue. The one dark cloud in this rosy dollar long scenario is energy costs. With a vicious cold front already covering the Northeast consumers may be hit with materially higher heating bills which could dampen their enthusiasm to shop. For the time being the euro may have more upside to go as our  contrarian internal positioning indicator has flipped negative on the pair for the first time in a week. However whether the EUR/USD has found true bottom or is simply charting a natural oversold retrace remains to be seen.   

In UK today, the BOE voted unanimously 9-0 to keep rates unchanged, and as a result of the news the pound found support around the 1.7200 level. The British Central Bank is convinced that economic activity in the 1st half of 2006 will surpass the lackluster  performance of 2005 though recent data such as yesterday's Industrial Trends report which printed -25 offers little evidence for that thesis, Nevertheless the market was relieved to have immediate pressure removed from sterling and rallied the currency to 1.7250 in London trade.

Boris Schlossberg is a Senior Currency Strategist at FXCM.