After rallying against the dollar yesterday, the yen settled in a quiet range trading between 119.60-119.95 for most of the Asian session  today but poked back through the 120.00 barrier in midday Europe as traders became cautious ahead of the FOMC meeting scheduled for 19:15 GMT later today. The market anticipates another rate hike from the Fed taking the Fed funds rate to 4.25% which would expand the interest rate differential between the pair to 425 basis points.

On the economic front,  Japanese Industrial Production increased 0.6% on a month over month basis and Capacity Utilization rose as well to 104.6 from 103.2 the month prior. This is the third consecutive monthly rise in Japanese production suggesting that underlying economic growth remains strong.

The news from the Euro-zone however, was decidedly mixed as ZEW Investor sentiment survey reached a two year high, but data from France and Italy dragged on the currency. The ZEW survey printed at 61 far higher than the 41 reading anticipated as investor confidence in Germany, the region's largest economy,  rose to levels last seen in February of 2004. The lower euro has helped spur sales for export oriented German industry which drove the DAX higher by 25% this year. Investors now appear optimistic as companies profits and dividends rise.

Yet neither France nor Italy appear to be benefiting from the recent growth as Italian Industrial Production actually declined -0.9% versus expectations of 0.5% rise. Meanwhile French CPI registered a deflationary like decline of -0.3% versus -0.1% projected.  After last week's horrid Industrial Production results and today's weak CPI data France is now the weakest link in the European universe and its poor economic performance is sure to give ECB pause regarding any further rate tightening moves.

In the US however, the Fed is expected to plow on to 4.25% rate hike, but the key question for the market will be whether it has intentions to go beyond the 4.5% already priced into the pair. If the Fed's rhetoric remains hawkish, the EUR/USD may retrace  most of yesterday's rally, especially as it now abuts the psychologically important 1.2000 level. However, in the last two days the pair has managed to ignore most of the negative news and such price action must hearten euro bulls as it typically indicates higher prices ahead.

Boris Schlossberg is a Senior Currency Strategist at FXCM.