On a day with no major economic news on the calendar in either the Euro-zone or US, the EUR/USD weakened giving up a good part of its gains for the week primarily as a result of selling in the EUR/JPY cross. After reaching all time highs at 142.80 yesterday the pair came under some profit taking tripping 1.1750 stops in the EUR/USD. The market is clearly searching for new themes and may spend the rest of this quiet news week producing choppy, meandering price action. One interesting aspect of yesterday activity was the fact that  traders focused on the weaker second tier reports out of the US rather than the stronger first tier performers. Namely the positive gains in US productivity were largely ignored while the market zeroed in on the -3.2% decline in Pending Home Sales.  This reaction dovetails with our thesis that further dollar gains will only come about as a result of materially better economic results. With the FX market now conditioned to expect strong US economic performance players will need to be convinced that rising US interest  rates will not have a negative impact on either US consumer spending or Housing demand.

Away from the majors, the market saw some very strong action in the New Zealand dollar as the kiwi dropped 108 points against the greenback despite the fact that RBNZ is expected to raise rates to 7.25% later in the day today.  The decline was triggered by the Standard and Poor's warning on New Zealand's widening Current Account deficit and Goldman Sach's recommendation to sell the currency. There is no doubt that the kiwi has become severely overbought on the back of carry trade flows, but with 7.25% - the highest amongst the most liquid currencies in the world -  kiwi' s run may not be over yet.

Boris Schlossberg is a Senior Currency Strategist at FXCM.