• Inverted Yield Curve Possibility Spooks Markets
• Pound Continues Slide On Rate Reduction Scenario
• Yen Data Continues To Sour Bullish Potential

US Dollar
Thin volume helped the greenback push past a handful of the majors against dour economic data for the world's largest economy.  Pushing aside a suggestion of slowed future activity in the Washington D.C. region and a brief realization of an inverted yield curve, traders bid the greenback higher in attempts to capture further carry trade potential before the new year.  Here, investors look to profit from not only the price appreciation of the underlying currency but also the interest rate differential between the two regions.  According to the Federal Reserve branch in Richmond, manufacturing activity slowed in the region, posting a negative 2 figure.  Against expectations of a rise to 10, the report normally would garner some attention as it provides some bearish undertones.  However, with policy makers still expected to raise interest rates another 25 basis points early in 2006, dollar bulls wanted to be first in line to gain the appreciation.  Nonetheless, even the most bullish dollar investor could not disregard the brief materialization of an inverted yield curve scenario.  During the session, the short term 2-year bond matched the longer term 10-year benchmark note at 4.37 percent.  The significance of the match comes in the form of a potential near term recession.  A financial phenomenon, the inverted yield curve has preceded the last four recessionary environments as investors remain bullish on rates in the near term while remaining wary of housing prices and consumption in the future.  Ultimately, this would add to nascent sparks of bearish suggestions as we near what some have considered the end of the Fed tightening policy.

Euro
Fueled mostly by interest rate speculation, traders desiring to take advantage of the carry potential in the EURUSD pair pushed the euro single currency lower.  However, contrary to  today's action, economic data was rather positive for the region as market pariticipants await the release of the most recent GfK German consumer confidence survey.  In the French economy, housing starts jumped higher by 13.9 percent against the previous 7.7 percent rise witnessed in October. Bullish for the economy, the figure is still one of the handful that is lending a positive bias to the economy.  With overall unemployment in the region still in the dumps and confidence tepid, investors will look to the upcoming industrial production and M3 money supply report later in the week.  Higher industrial production will boost earlier rising growth seen in German factory orders as M3 money supply figures would be suggestive of near term inflationary pressures.  Both would surely boost the probability of a interest rate hike by the European Central Bank in the near term.

British Pound
Bearish momentum continued to pressure the pound lower as it has become increasingly accepted that the Bank of England will be heavily considering a rate cut in the new year.  Reasons are abound including the clear showings that productivity remains suppressed and consumers remain at home.  Most recently, gross domestic productivity matched already slashed forecasts with considerable declines seen in overall total business investment and a widening of the current account.  Although inflation does remain a concern in the United Kingom, it remains to be seen as to the strength of the current trend.  Mostly bolstered earlier by higher energy prices, inflation may abate soon enough as crude oil supplies seem to be outstripping global demand, driving prices lower.  The dip in consumer prices would be inline with earlier statements by Governor Mervyn King in mid year that inflationary pressures remained temporal and simply a "shock" to the economy.  That would leave none other than consumer consumption concerns to surface and given the current rate environment, policy makers would most like side with a reduction in order to spark some much needed activity.  As a result, although this may add further near term pessimism, the longer term result may be positive for the ailing region.

Japanese Yen
Positive housing data failed to lend any optimism to yen bulls as housing starts vaulted 12.6 percent higher.  Continuing the overall positive uptrend since February the figure was better than the 7.3 percent expected in the month of November.  Nonetheless, bears still hover over the underlying spot price as recent data has been rather sour for the land of the rising sun.  With household spending still lackluster and cellar dwelling consumer prices persistent, traders are looking ahead to industrial production figures and retail trade figures later tonight.  Although a jump in numbers may spark some speculation that higher rates may be considered by policy officials, the reality is that longer term factors need to change first before these considerations can materialize.  Granted, expanding industrial production may confirm a turnaround, policy officials, as noted numerous times before, will not consider the aforementioned given the persistence deflationary environment.  To that end, the growing producitivty must lead to higher wage and earnings growth, subsequently leading to an explosion of individual consumption.  Only then, with a resurgence in consumer attitudes and spending habits, will the region truly experience a turnaround for the better.

Kathy Lien is the Chief Currency Strategist at FXCM.