The euro and the yen remained essentially unchanged in early European trade supported in part by solid economic data. In Japan Overall Household spending rose by 2.0% on a year over year basis * the second such gain in three months. Coming after a string of month to month declines throughout most of 2005 this is the first positive sign of moderate strength in Japanese consumer spending. Most analysts are convinced that regardless of how well Japanese corporate sector performs, the BOJ will not abandon its ultra accommodative monetary policy until Japanese consumer spending improves. For yen bulls this was a ray of hope for a pause or perhaps a turn in what has been one of strongest one way moves in the currency market this year.

In Europe, the industrial sector continues to reap the benefits of the lower euro  as Factory Orders rose a healthy 2.0% versus 0.5% projected. The region's Retail PMI also nudged higher to 50.7 from 50.4 the month prior. As European retail demand finally awakens the Euro-zone growth should increase, providing further support to the single currency.

The big story of the night however comes from across the Channel. UK Manufacturing and Industrial production both plummeted, declining -0.7% and -1.0% respectively against expectations of 0.2% rise. As a result sterling dropped nearly 90 points in response. After the longest period of  expansion in over 200 years, UK's economy may be slowing to a crawl. Manufacturing is clearly in a recession while Retail and Housing sectors are holding their own for now. BRC Retail Sales Monitor showed a healthy jump in total sales of 4.6% in November. However, should retail spending falter BOE will be forced to cave in and 4,5% yields will be history as the rate lowering cycle will begin in earnest. Should that happen the pound may weaken as carry trade speculators drop the currency like a hot potato.

Boris Schlossberg is a Senior Currency Strategist at FXCM.