US Dollar
The US dollar starts the new week stronger against all of major currencies as it continues to shake off its post non-farm payrolls weakness.  The ambiguous message from the mixed NFP report last Friday kept the door open for another rate hike in August while the record high in energy prices hit last week only further escalates the inflation concerns for the Federal Reserve.  Many traders were short dollars going into the non-farm payroll release and the rally today was an extended reversal of those trades. Oil is all we have to rely on for the time being as the other inflation gauges such as consumer prices are not due out until next week.  CPI comes out on the very same day that Bernanke is scheduled to give his semiannual testimony on the economy, which means that prices could consolidate towards a breakout point on that day.  All traders should have July 19th circled on their calendar because at this point, it should be an extremely market moving day. In the meantime, we do have two event risks that could cause some mild volatility in the currency market (Trade Balance and Retail Sales), but unless they come out significantly different from market expectations, they will probably not shift the Federal Reserveââ,¬â"¢s plans for interest rates by much.  The market is still divided on whether another rate hike will be delivered in August, which makes the next few weeks of economic data even more important. Inflation has become such a grave concern for the Federal Reserve that they are increasingly willing to risk inducing a contraction in the US economy at the expense of taming inflation.  This is the message that FOMC voting member Kohn gave to the markets last week and one we should listen to carefully.  The only pieces of economic data released this morning were wholesale inventories and wholesale sales.  Both were stronger than expected and is positive for growth, but by the same token, these are second tier indicators and have less of an influence on the US dollar than the trade balance and retail sales later this week.  Hank Paulson was sworn in as Treasury Secretary today and he did not make any mention of the US dollar in his prepared remarks.  As a very well respective Wall Street leader, Paulson is one of the best chances that the market has for some meaningful changes in fiscal policy.  We should see a more formalized plan from him in the fall.  In the meantime, there is still a lot going on in the currency market, including what could be an extremely important Bank of Japan Monetary policy meeting as well as speeches by central bank officials around the world. 

Euro
Despite the fact that European officials repeated their solidly hawkish comments, the Euro has lost ground against the US dollar as traders are reminded that it is greenback that runs the show.  Euro group President Junker explicitly said that the central bank would be raising rates again soon which should not be surprising for most traders since ECB President Trichet turned the August 3rd meeting from a conference call to a full fledged monetary policy meeting with an accompanying press conference.  Economic data released this morning was Euro positive with the German trade balance increasing more than expected and French Industrial production accelerating faster than the marketââ,¬â"¢s predictions in May.  There continues to be a great deal of Eurozone economic data due for release this week and we expect them to reflect a rosier economic situation as well as heightened inflation pressures.  The World Cup has come to an end this past weekend which means that here on forward, Germany would need to rely on domestic demand to continue its current pace of growth.  Hopefully, World Cup attendees have spent enough to keep local businesses optimistic for many months to come.

British Pound
The British pound has also weakened against the US dollar today as mixed economic data provides little additional clarity on the health of the UK economy.  House prices as reported by the Office of the Deputy Prime Minister accelerated by a more than expected 5.6 percent in the month of May, up from 5.1 percent in April.  Core output producer prices also grew at a faster pace last month as the annualized rate of growth hit 2.9 percent from 2.5 percent the month prior.  Although this is encouraging, the surprising 0.2 percent dip in input suggests that inflation pressures are not that worrisome.  Either way, it leaves the British pound to the whim of dollar bulls until we see the more important UK domestic earnings report due out on Wednesday. 

Japanese Yen
The Japanese Yen is stronger against all of the major currencies except for the US dollar.  The market continues to speculate on the possibility that the Bank of Japan will drop their zero interest rate policy Thursday night.  Helping to spur that speculation was the fastest growth in bank lending in ten years.  This is the fifth consecutive rise and shows the confidence that banks have on the economic recovery.  Comments from Economic Minister Yosano also fueled some of the gains as he said that now is right time to discuss ending the countryââ,¬â"¢s zero interest rate policies.  As we move closer to this possibility, the end is near, but far from certain.  Therefore if the BoJ does surprise with an unchanged stance, much of the Yen gains could be reversed in the light of Japan contemplating a pre-emptive attack on North Korea.  China has sent a senior envoy to North Korea to help pacify the situation and hopefully it works.

Kathy Lien is the Chief Currency Strategist at FXCM.