• Dollar Breaks Higher as Snow Downplays Weak GDP Report
• Swiss Suffers on Weak Data
• Government's Persistence in Keeping ZIRP Offsets Stronger Data

US Dollar
It has been quite a see-saw ride in the markets today as we first watched the dollar sell off significantly against the majors after the weaker than expected fourth quarter GDP report to then completely reverse the move and hit a new daily high against the Euro.  Price action wise this caused the EUR/USD to take out the 1.2150 support level and hit a low of 1.2087.  The speed and depth of the move tells us that the triggering of stops at various levels exacerbated the sell-off, especially at the London close.  The only fundamental explanations for the move are two fold, but bottom-line, it all boils down to the Fed's rate decision.  New home sales increased 2.9 percent in the month of December by a more than expected 1.26 million.  Coming off the heels of a weaker existing home sales report, the strength caught the market by surprise and it certainly didn't hurt that US Treasury Secretary Snow came on the wires 10 minutes before the home sales release downplaying the significance of the earlier GDP report.  He cautioned against paying too much attention to the GDP report since he expects upward revisions in the months to come and ultimately he feels that the economy's performance is still sound.  This left the market with the impression that today's release was an outlier, especially since the personal consumption and GDP price index figures were stronger than expected.  What is most important is that despite the weaker GDP number, expectations for a March rate hike is still intact and in fact, ticked higher modestly.  There is now an over 70 percent probability that we will see 4.75 percent rates by the end of the first quarter.  The type of volatility that we saw this week is set to continue well into next week thanks to a heavy economic calendar.   The number one event to watch will first be the Fed's January 31st rate decision.  As the last one that Greenspan chairs, the market will be watching carefully to see if there are any major shifts in tone.  A more neutral statement would be not be surprising and should only be taken as mildly dollar bearish at best.  If the statement is more cautionary about inflation or energy price pressures, that would be taken as dollar bullish.   After the FOMC rate decision, we still have manufacturing and non-manufacturing ISM, Chicago PMI, Factory orders, and the ever important non-farm payrolls report. 

Euro
Trading in the EUR/USD currency pair today was left to the whim of the dollar as money supply and Italian business confidence served as the only releases on the Eurozone's economic calendar.  Annualized money supply growth slowed from 7.6 percent to 7.3 percent, which was slightly worse than expected.  Italian business confidence increased from 91.2 to 92.7.  The calendar next week will be far busier with labor market, retail sales, confidence and manufacturing reports due for release. Of more interest today however, were the releases from Switzerland, which fell short of expectations, helping to spark a sell-off in the Franc against both the Euro and US dollar.  Retail sales growth slowed from an annualized 2.8 percent to 2.2 percent in the month of November.  The KoF report of leading indicators came in at 1.22, which was far short of the market's 1.42 forecast for the month January.  The index for the previous month was also revised downwards from 1.36 to 1.17.  Such disappointing numbers puts to question the strength and sustainability of the Swiss economic recovery as well as whether the Swiss National Bank will opt to increase rates once again by 25bp.  If you ask the President of the Swiss National Bank, he would probably give a resounding yes since it was only Wednesday that he viewed the 2006 economic outlook as "excellent."

British Pound
Like the Euro, the British pound suffered greatly against the dollar today.  Mortgage lending figures released by the British Banker's Association was slightly more encouraging with mortgage lending in the month of December up 25 percent from the year prior.  The group also reported that this was the strongest monthly rise since June 2004.  Although the dollar's rally masks the market's true perception of the UK housing market and growth, this morning's much stronger rally in the pound versus the euro  may be indicative of the market's gradual shift.  Signs of a possible stabilization in the UK have some believing that another rate cut by the Bank of England is far from certain.  In the week ahead, we will have a bit more housing market data including the Nationwide house prices and mortgage approvals to shed some more light on the issue as well as manufacturing and construction sector reports.

Japanese Yen
Today marked the fourth straight day of gains in the dollar against the Japanese Yen with virtually no retracement.  Bullishness following stronger inflation and consumer spending reports released overnight were offset by dovish comments from Heizo Takenaka, the Minister of State for Economic and Fiscal Policy.  Consumer price inflation for Tokyo increased 0.5 percent in the month of January with a 0.2 percent rise in core prices.  This was much stronger than the market's respective 0.2 percent and -0.1 percent forecasts. National CPI reports for December were also stronger on a headline level, but core prices remained unchanged.  Retail sales increased 0.8 percent for December, which were double expectations with an upward revision in November sales from negative 0.2 percent to positive 0.2 percent.  Despite the signs that deflation is receding, Takenaka was quick to come on the wires warning about how deflation is not finished.  Clearly the Japanese government and its officials have an agenda to keep the Yen weak and monetary policy stimulative.

Kathy Lien is the Chief Currency Strategist at FXCM.