• Euro Traders Tread Carefully Ahead of ECB Rate Hike
• British Pound Breaks Higher on Neutral Comments from BoE Official
• Dollar Yen Continues Climb Following Positive US Data

US Dollar
The dollar's price action today against the major currency pairs has been very mixed.  Having lost ground against the Euro and pound, the greenback managed to stage a rally against both the Japanese Yen and the Swiss Franc.  The divergence in price action highlights the lack of a clear trend in the dollar at the moment.  Even though today's economic data was relatively optimistic, extending the tone of yesterday's stronger reports, the uncertainty of data and events looming has made traders far more cautious.  In terms of the data released, preliminary third quarter GDP was revised to 4.3 percent from the advance reading of 3.8 percent while the market had only expected a more modest 0.2 percent revision.  Personal consumption was also revised higher from 3.9 percent to 4.2 percent.   Meanwhile, extending the optimism of the GDP report was a smaller than expected contraction in the Chicago PMI.  The underlying components of the report were equally positive for the dollar with order backlogs hitting a one year high and the prices paid index jumping from 79.6 to 94.1.  Yet the Beige Book report sums it up best.  There were only a handful of changes from the previous report, but most of the changes highlighted improvements.  Overall, the "economic activity continued to expand" and only one district reported a slowdown in activity, compared to the two reported last time around.  Increased hiring was also seen in a number of districts, paving the way for continued gains in the non-farm payrolls report. 

Euro
The Euro edged higher today in anticipation of the first rate hike in 2.5 years.  Even conflicting comments from the OECD, ECB and a German official failed to deter traders from hopping on the Euro bandwagon.  An unnamed German official warned that an ECB rate hike will not help growth while OECD Gurria cautioned against a series of rate hikes.  ECB Member Bini Smaghi on the other hand felt that interest rates are at a very low level and "no one can say rates are too high."  He advocates "limited" and gradual rate hikes to control inflation.  At this point, a 25 basis point rate hike has been completely priced into the market.  The real uncertainty and the reason why Euro traders are treading carefully is because no one is quite clear about what ECB President Trichet will say in the accompanying press conference at 13:30 GMT.  With some analysts calling for a 50 basis point rate hike instead of a quarter point hike, there are sure to be some traders who may expect more cautious comments from the ECB President.  However, his previous comments were primarily focused on down playing expectations that the ECB will be following in the Fed's footsteps by delivering a series of aggressive hikes.  Meanwhile economic data released this morning was mixed.  German retail sales came in stronger than expected for the month of October, but the drop in the previous month was also revised down significantly.  The German ILO unemployment rate edged higher from 8.2 percent to 8.7 percent.  The French unemployment rate on the other hand fell to 9.7 percent from 9.8 percent as more people dropped stopped claiming unemployment benefits.  Yet confidence across the region was less optimistic with both the Eurozone confidence and French confidence numbers falling.  Finally, even though the inflation estimate was revised from 2.5 percent to 2.4 percent, it is still above the ECB's 2 percent target, which prevents the central bank from backing away from a hawkish bias. 

British Pound
The British pound exploded higher today with sterling crosses leading the moves in the market.  Surprisingly, there was little catalyst for the break higher.  The Gfk consumer confidence report was unchanged, which was right in line with expectations.  The only possibility could have been the more neutral comments from MPC member Walton and reported mergers and acquisition news.  Walton said that with the economy regaining momentum, he didn't feel that the central bank should be doing anything precipitate, which threw cold water on those who expected the BoE to continue to put serious consideration into future rate cuts.  In terms of mergers and acquisitions, there has also been news that Dubai Port International may be intending to purchase Peninsular & Oriental Steam Navigation Company for GBP3.9 billion.  Such a large flow would surely have some meaningful FX impact. 

Japanese Yen
The Japanese Yen came within a hair shy of its two year high today as the currency pair yen remains the clearest interest rate based trade.  Even though Japanese economic data has been improving, the government remains adamantly against dropping their quantitative easing program too quickly.  This has allowed traders to downplay the more optimistic numbers that we have received overnight.  According to the November PMI report, manufacturing activity expanded by the highest pace in 18 months, with the index climbing from 54.7 to 55.3.  Housing starts also rose by 9.1 percent in the month of October, after falling 0.2 percent the previous month.  This suggests that both manufacturing and residential activity has been healthy, which helps to explain the persistence of the stock market, which hovers near five year highs. 

Kathy Lien is the Chief Currency Strategist at FXCM.