• Yen Leads Movers This Past Week As Speculators Run for the Exit
• Not Many Events to Take Focus Off Slower Rate Hikes in US Next Week
• Euro Rebounds After Stronger IFO

US Dollar
One day of losses is followed by another day of gains - that has been the story of the dollar against the Euro for the past seven trading days.  With no new news expect for a rather mild current account number, traders took a step back and reassessed the macro ramifications of this past week's developments.  For a single week alone, we have had quite a bit of volatility, especially as the Fed first set the tone for the week by shifting their bias ever so slightly and paving the way for Bernanke to make any decision that he pleases.  Then the conflicting economic data released over the next few days, such as the stronger TIC report, larger trade deficit and bigger drop in consumer prices left the dollar range bound for the reminder of the week.  Despite the consolidation, we believe that the directional bias for the dollar in 2006 has already been set.  Although the shift by the Fed was mild, it signaled to traders that the Fed is indeed slowing down, and that the next major change for traders to keep their eyes and ears open for is a definitive sign from the Fed that the end has come.  At which time we could very well see a big turn in the market.  In the week ahead, the market will be gradually shifting to holiday mode.  If we do not break out soon and see sustained momentum above the 1.20 level or below 1.1950, we may be subject to nothing more than range trading for the next two weeks.  The economic calendar is relatively light with GDP and Durable Goods as the only major pieces of economic data on the calendar and even GDP is far less market moving these days than it use to be.  Also, PPI is due for release, but after the big drop in CPI, the market has already discounted the possibility of a contraction in PPI.  Alternatively, if PPI does come in stronger than expected, the market will probably just shrug off the increase and reassure themselves by saying that the Fed's focus is primarily CPI and not PPI.

Euro
The Euro rebounded against the dollar today following stronger economic data.  The German IFO jumped from 97.8 to 99.6 in December as business sentiment continued to improve.  This should come as no surprise after the encouraging ZEW survey released earlier this week.  Overall, the story in Europe remains very much the same.  Like a broken record, we continue to sing the tune that even though the business sector and the export market have rebounded thanks to the weaker Euro, the average citizen and worker have yet to feel the benefits of the recovery. For the most part, it seems that European corporations are erroring on the side of caution, making sure that they will not regret their wage increases when the Euro begins to rise.  However, if the economies within the Eurozone continue to improve, it is inevitable that corporations will filter some of the benefits back to their workers.  When this time comes, the ECB may become much more liberal with their rate hikes and deliver to the markets what they will be waiting impatiently for, which is the ECB's next bout of tightening.

British Pound
The British pound rebounded today despite the lack of economic data.  The move was primarily a result of dollar bearishness and not sterling optimism. Over the past week, we had mostly weaker data, except for retail sales, but the strength of that data was also unclear since it contrasted with the CBI report.  In the week ahead, if it was up to the pound, we would be expecting far more quiet trading since the only economic data that has even a remote possibility of moving the markets will not be released until Thursday and its ability to move markets still remains in question since the GDP report is a final release.  The other piece of key data due out that same morning is the current account figures for the third quarter, leaving pounds trader hope.  For the GBPUSD pair, volatility could still be brought on by US factors, especially since the trading range is beginning to contract in an ascending triangle formation, signaling a possible breakout. 

Japanese Yen
The dollar yen (USDJPY) currency pair continues to be one of the biggest movers in the market today. In fact, this past week, USDJPY saw it's the biggest weekly sell-off in almost 6 years.  USDJPY traders are running for the exit and there has been nothing standing in its way.  The Bank of Japan left monetary policy unchanged last night as expected and remained relatively upbeat on the future outlook for the Japanese economy.  They still see exports continuing to improve and industrial production trending upwards, which suggests to them that the economy continues to recover.  More interesting today was another sign of trouble in Japanese politics. Overnight, the Japanese government called for closer cooperation between the government and the central bank and suggested that the central bank use the GDP deflator as a measure of inflation.  The BoJ on the other hand has always preferred to use the CPI measure and reiterated their lack of desire to move to the GDP deflator shortly afterwards.  Following the government's comments, BoJ Governor Fukui was on the wires reiterating the need to watch for stable and then positive CPI growth before putting an end to their zero interest rate policy.  He did note that according to CPI, the inflation outlook is improving.  The big debate in Japanese politics at the moment is that the BoJ wants to raise interest rates soon and the government does not.  With the market expecting some sort of move next year, it will be interesting to see how this tug of war plays out.  Overall, politics seem to be a big factor impacting the currency markets globally over the past year.  With Koizumi expected to leave office in September 2006, that could be what the BoJ needs to wait for before having the flexibility to raise rates without turning the current flame into an all out forest fire.

Kathy Lien is the Chief Currency Strategist at FXCM.