• Dollar Reverses Losses After Fed Decision
• British Pound Holds Onto Gains Thanks to Housing Data
• Japanese Household Spending Jumps in December

US Dollar
The dollar sold off significant today ahead of the Federal Reserveâ�,��"�s interest rate decision but recuperated nearly of its losses after the announcement.  As expected, the Fed delivered its thirteenth consecutive 25bp interest rate hike which brought the target for the federal funds rate to 4.50 percent.  Even though the Fed dropped the phrase â�,��"measured,â�,� from the statement, they kept the rest of the sentence which said that â�,��"further policy firming may be needed.â�,�  They were also optimistic on growth, noting that â�,��"Although recent economic data have been uneven, the expansion in economic activity appears solid.â�,�  On the inflation front, even though â�,��"core inflation has stayed relatively low in recent monthsâ�,�¦. increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures,â�,� which is another hawkish line.  Therefore it is irrefutable that at this juncture, the Fed is definitely eyeing a March rate hike.  Also with over 80 percent probability for a rate change already priced into the market, they probably did not want to rock the boat without seeing more evidence of slowing.  With 2 full months until the next meeting, the Fed gave themselves enough leeway by saying that â�,��"they will respond to changes in economic prospects as needed.â�,�  Dollar bulls now have their validation to move pump the dollar even higher if the rest of the data released this week come in positive.  Consumer confidence increased from 105.0 to 106.3 in the month of January. Manufacturing activity in the Chicago region (as measured by the PMI) fell from 60.8 to 58.5.  The Employment cost index for the fourth quarter remained unchanged at 0.8 percent.  There is a lot of data still due for release this week, so expect more exciting price action. 

Euro
The market was so focused on what was to happen in the US today that they completely shrugged off the significantly weaker economic data released from Germany overnight.  The market had been expecting German retail sales to increase by 1.0 percent last month, but instead, it fell a surprising 1.6 percent.  The number of unemployed people also increased by 69k this month compared to the marketâ�,��"�s forecast for a 20k drop.  This bumped the unemployment rate up to 11.3 percent from 11.2 percent which taken together is sure to setback expectations for hawkish comments by ECB President Trichet this Thursday.  Prior to todayâ�,��"�s releases, Germany was the leader in growth for the region and improving economic data sold the market on the countryâ�,��"�s slow and steady recovery.  However todayâ�,��"�s report puts the strength of the rebound in question especially since it indicates that despite improving business activity and confidence, the benefits have yet to filter onto consumers who remain very hesitant.  Over in France, data was mixed.  Consumer confidence and housing starts improved, but producer prices fell for the second consecutive month.  Overall, this definitely stifles expectations for a near term rate hike especially since Germany was suppose to be the leader in growth that was pulling the entire region higher.  France on the other hand was offsetting some of the growth with lagging performance.  The only Euro related development that could have aided the Euro were comments by Russian President Putin who said that thanks to their strong economy Russia would be able to repay their Paris Club debt earlier than scheduled.  In order to do so, they would need to sell Rubles and buy Euros. 

British Pound
The British pound joined the rally today and in fact staged a much more impressive move than the Euro.  The reason why we are seeing this difference in relative performance is because recently, economic data released from the UK has been suggesting that things may not be all that bad across the Atlantic.  Previously, the market had expected the Bank of England to deliver another rate cut in the first quarter and for economic data to confirm the need for one.  Recently though, data has proven otherwise.  Today, M4 money supply confirmed the signal given by the M0 money supply, which is that inflation pressures are still prevalent.  Although consumer credit slowed from 1.0 billion to 0.8 billion, mortgage approvals and house prices ticked higher.  In fact, house prices measured by Nationwide increased 1.4 percent in the month of January against market expectations for a 0.5 percent rise.  Clear signs of stabilization in that part of the economy are certainly comforting for traders who have become conditioned to watching the health of the housing market.  However, there are new things that the BoE is concerned with these days.  According to the recent minutes, they are watching business investment and exports closely.  BoE Nickell warned about domestic demand falling below trend and downplayed inflation risks which is something the central bank has been doing quite often recently which tells us that we too should pay lesser attention to the short term inflation risks that the UK faces for now.

Japanese Yen
The Japanese Yen has finally managed to stage a rally after sliding for five consecutive trading sessions against the US dollar.  Economic data released from Japan last night was mixed, but the key release, workerâ�,��"�s household spending came in stronger than expected.  Spending increased 3.2 percent year over year in the month of December, indicating that domestic demand may be finally adding to growth.  The jobless rate also fell from 4.6 percent to 4.4 percent while the purchasing managerâ�,��"�s index jumped from 55.7 to 57.0, the highest level on record.  The bad news of the day was housing starts which fell 0.9 percent last month against market expectations for a 7.2 percent rise.  Small business confidence also fell from 50.1 to 49.6.

Kathy Lien is the Chief Currency Strategist at FXCM.