• Dollar Rebounds Thanks to Strong Data
• Muted UK Data Fails to Prop British Pound
• Dollar Yen (USDJPY) Erases Losses

US Dollar
As we have warned, the abundance of global data due out this week could cause a great deal of volatility in the currency markets. Today, strong US data has helped the dollar recuperate much of yesterday's losses.  However, the retracement in the EUR/USD has stopped short of breaking yesterday's low, which for dollar bears may still spell hope. Durable goods rose 3.4% in the month of October, over double expectations.  Given that the ex transportation number rose a less than expected 0.3%, we can be assured that the end to the Boeing strike played a big role in the boost in orders.  Even though, bankruptcies in the US airline industry are something that we have all become quite familiar with, across the Atlantic, the airline industry remains healthy.  Both Boeing and Airbus have benefited from the emergence of deep discount airliners. After yesterday's weaker existing home sales report, today's new home sales report blew away any immediate concerns for a major housing market slowdown.  Sales of new homes surged 13% to a record high of 1.424 million.  The average price of homes also rose 1.5%.  To top that all off, consumer confidence also rose by the biggest amount in 2 years to 98.9, far above the market's 90.2 forecast. With such strong optimism, holiday shopping this season may not be as weak as signaled by this weekend's revenues. 

Euro
Strong US data has prevented the Euro from holding onto its gains.  The market continues to remain focused on the ECB's pending rate hike on Thursday, but the possibility of continued strength in US data for the remainder of this week has kept dollar bulls in the market.   One, somewhat controversial, number that the ECB is taking into account in its decision is the M3, a broad measure of available money in the economy, which rose 8% from October 2004, as released today.  Although the US Fed feels that this measure is not worth measuring, the ECB is troubled by the fact that the M3 expansion has been above 4.5%, the level that the ECB considers non-inflationary, since May 2001.  Some economists deem that the ECBs reliance on the M3 could cause them to raise rates too soon.  Many groups, including governments and businesses, are urging the ECB to reconsider this move as they are not sure that the already slow and fragile growth in the Euro-zone can withstand a rate hike.  They argue that inflation is down with the drop in oil prices and evidence of second round effects is weak while hurting economies are apparent.  It is almost definite that the ECB will raise its rate on December 1, so traders will be concentrating on the comments that come with the announcement to see what the plans for the future are.  A hike to 2.25% without any further raises will not help the Euro much as traders concentrate on widening interest rate differentials.  However, it is unsure whether the economy of the Euro-zone can withstand a series of rate hikes and President Trichet has made efforts to downplay expectations future raises. 

British Pound
Although positive, data coming from the UK was not particularly strong, which probably contributed to today's slide.  Nationwide house prices stayed stagnant from October to November after jumping 1.3%, the most in 15 months, in the month prior.  As the effects of the August rate cut wane, the housing market is cooling.  Mortgage approvals during the month of October actually reached their highest in about a year and a half, possibly signaling that the housing market is stabilizing after the slowdown seen over the past year.  Net consumer credit also rose to GBP1.3 billion in October as consumers continue to pile on debt to finance spending.  Consumers are feeling the strain of this debt however as bankruptcies continue to increase.  M4 lending during October saw a fall from September's level, however, down to GBP9.9 billion.  With the housing market looking to be stabilizing and consumers continuing to borrow, hopes are that improvements in spending and confidence will follow close behind especially with the onset of the holiday shopping season. 

Japanese Yen
Yesterday we had said that the uptrend in USDJPY was far from over with the price action diverging from fundamentals.  Especially since it was only recently that the Japanese government began sending signals of reluctance towards moving away from their quantitative easing policy.  The economic data released overnight was more mixed and highlights the murky outlook for the Japanese economy.  Although the jobless rate increased unexpectedly from 4.2% to 4.5%, the change was not due to an increase in jobs lost, but instead due to a growing number of people re-entering the job market as prospects brighten for the labor market.  Worker's household spending also rose by a more than expected 1.3% in the month of October.  The market had been expecting for a modest 0.2% rise, but with higher wages and better job prospects, spending has picked up as people become more confident in the future economic outlook.  Small business confidence also rose for both November and December.  However, not all news was good news as industrial production rose by only 0.6%, considerably lower than economists predicted, as companies are meeting high demand by selling off inventories.  This reduction of stock leads to expectations that heavy industrial ordering will occur during November as companies replenish inventories.  Auto production, however, actually fell for the first time in three months by 1% as domestic demand slowed.  Car companies have failed to come out with new models discouraging Japanese consumers from purchasing.  The mixed tone of data signals to the Bank of Japan that it is still not time for a rate hike anytime soon.

Kathy Lien is the Chief Currency Strategist at FXCM.