US Dollar
The US dollar extended yesterdayââ,¬â"¢s losses as Asian and London traders joined the markets overnight and repositioned themselves on the back of the less hawkish Fed comments.  We had said in the last daily fundamentals that the current dollar weakness against the Euro could aim for the previous 1.2975 high in the EUR/USD and 109 low in USD/JPY.  We are now over 100 points closer to those levels than yesterday with little standing in the way.  The US economic data released this morning was so conflicting that it had little impact on the actual price action of the US dollar and it only further validated the Fedââ,¬â"¢s shift to becoming more data dependent.  Personal income came in stronger than expected, rising 0.4 percent with an upward revision the prior month.  Spending along with the core PCE deflators were right in line with expectations but the lack of any upside surprises in those reports was seen as more disappointing than neutral.  Furthermore, the savings rate continued to slide and is now at -1.7 percent.  Even though consumer confidence was stronger, any optimism was offset by a weaker Chicago Purchasing Managers index.  The market is shifting to holiday mode here in the US but just because many US traders may be out of the office Monday and Tuesday does not mean that things will quiet down in the currency markets.  There are a great deal of economic data due for release next week including the quarterly Japanese Tankan report Sunday night and the US ISM report on Monday.  Do not forget that Asia and London traders are still in and that London is actually a more active center for currency trading than the US.  As we head into Bernankeââ,¬â"¢s July 19th semi-annual testimony on the economy, we expect the market to accentuate the negative and minimize the positive.  Any weak data would only exacerbate the exodus of dollar bulls and validate the argument that the Fed will pause in August.  The only hope for a dollar bounce would be a stronger non-farm payrolls report on Friday.  Analysts are expecting 155k jobs to have been created in the month of June.  However, with the recent track record of the analystsââ,¬â"¢ predictions for NFP, the odds are that they will be overly optimistic once again. 

Euro
After quietly consolidating for the past three weeks, the EUR/USD has finally broken out of its trading range and is leading the pack in gains.  Aside from dollar bearishness boosting gains in the currency pair, speculation that the European Central Bank could be even more aggressive is also benefiting the Euro.  Like the Fed rate decision, the market has come up with a variety of possible scenarios on how aggressive the ECB may be.  Presently, the most likely scenario is for a rate hike in August, which is when the central bankââ,¬â"¢s monetary policy meeting will be accompanied by a press conference.  However some traders are speculating on an earlier hike next week or even a 50bp hike in August.  This is extremely unlikely given the latest Euro rally.  Any surprises from the ECB could push the Euro above 1.30, which is beyond their comfort zone.  Earlier this month, Austrian Finance Minister Grasser said that as long as the Euro stays between 1.20 and 1.30, they are comfortable.  As an export dependent economy, we expect central bankers to be far more conservative as we near the top of that range.  Keeping interest rates on hold next week is probably the smartest option for the ECB if they do not want to control the rally in the Euro.  The week ahead brings us more key Eurozone economic data including the manufacturing and service sector surveys, unemployment, retail sales for the region and industrial production.  Meanwhile economic data released this morning was mixed with German retail sales falling more than expected but Eurozone business and consumer confidence hitting a 5 year high. 

British Pound
Having been one of the weakest currencies in the beginning of the week, the British pound is the dayââ,¬â"¢s strongest.  Better than expected UK economic data has helped the British pound extend its rally.  UK GDP for the first quarter was revised higher from 0.6 percent to 0.7 percent.  Consumer confidence also improved from -5 to -4 while the current account deficit for Q1 narrowed from -9.1 billion to -8.3 billion.  Although certainly encouraging for the UK economy, it does not negate the less hawkish comments from the Bank of England yesterday.  However, the BoE is a very dynamic central bank that often changes their bias based upon the trend of economic data.  Therefore if we see more strength, the BoE could very switch views again.  Next week, we are expecting industrial production, manufacturing and service sector PMI reports.  The Bank of England is meeting to decide interest rates, but no changes are expected. 

Japanese Yen
The Japanese Yen is weaker against most of the majors except for the US dollar.  Carry trade liquidation can probably be credited for the yenââ,¬â"¢s strength against the dollar, but the mixed economic reports last night make it difficult for traders to bid up the currency against the Euro, British pound and Swiss Franc.  The good news is that the labor market is improving with unemployment falling to 4.0 percent, the lowest level in 8 years.  Household spending also increased more than expected, as did housing starts.  However, the bad news was that the purchasing managersââ,¬â"¢ index fell to the lowest level in 10 months while the much awaited Tokyo consumer price index fell 0.1 percent.  In contrast, the national index rose 0.3 percent, but the clear divergence between the two reports dents BoJ rate hike expectations.  Finance Minister Tanigaki was on the wires shortly after the release to say that even though the deflationary situation is improving, it is not over.  Sunday night, we are expecting the quarterly Tankan report of business sentiment, which is one of the most important Japanese economic releases.  Depending on which way the Tankan sways, we can either see a more broad based yen rise or another nice correction.

Kathy Lien is the Chief Currency Strategist at FXCM.