US Dollar
All is quiet on the US calendar today but with many hotspots around the world igniting, the markets have been anything but boring.  Oil prices have hit yet another new record high and that has helped the Canadian dollar recuperate some of yesterday's losses, while gold prices continued its relentless climb, aiding in Aussie strength.  The only piece of economic data released today was initial jobless claims which increased by 19k to 332k as automobile plants shut down for the summer.  However today's quiet could be tomorrow's volatility.  Tonight we have an extremely important Bank of Japan meeting and tomorrow morning, we are expecting US retail sales for the month of June.  The market is predicting a strong report, especially since consumer confidence as measured by the University of Michigan survey soared to a three month high in the month of July. Confidence is seen as a leading indicator for spending because the belief is that happy people usually spend more while people worried about their jobs and the economy tend to be thriftier.  The risks for a weaker report still remain however as higher interest rates increase monthly payments of credit cards ands adjustable rate mortgages at a time when oil prices remain high.  Even so, a stronger retail sales number is not necessarily resoundingly dollar bullish.  Analysts will question whether the strong pace of spending in June can be sustained in July.  Between mid June and the present, oil prices have increased by $8 a barrel or 12 percent suggesting that a strong June report may not be followed by an equally impressive spending in the month of July.  Nevertheless, strong spending and strong inflationary pressures is just what the Federal Reserve is looking for as a reason to raise rates again in August and the market will not overlook that link as we head into what will prove to be a busy week.  Many of the majors are testing the outer bands of its recent ranges and appear ready to break out.  The comments from Federal Reserve Chairman Ben Bernanke next Wednesday could be the possible driver. 

Euro
As expected, the ECB monthly report was just as hawkish as the recent comments by Eurozone central bankers.  However the market was surprised to see slight disappointments in the German and French consumer price indices for the month of June.  French CPI was actually flat while German CPI growth was less than expected.  This brought the annualized pace of inflation in France down from 2.1 percent to 1.9 percent.  The annualized pace of growth in Germany also slowed from 2.1 percent to 2.0 percent.  This put France's rate below the ECB's 2 percent inflation target and the Germany's rate right at it.  Even though oil prices will probably have pushed inflation higher in next month's report, the slower pace of growth in June suggests that the ECB could raise interest rates in early August, which would be in line with their signals, but then back off of another immediate rate hike.  How aggressive they choose to be will be dependent upon how much further oil prices can rise.  Meanwhile the Swiss franc has been a primary beneficiary of the latest struggle between Lebanon and Israel.  The country's political neutrality makes it an attractive place for investors to park their money in times of geopolitical confusion. The market's flight to safety has not only boosted the Swiss Franc, but also gold. 

British Pound
The Bank of England announced two new members for their Monetary Policy Committee today. After the death of David Walton and the departure of Richard Lambert, the MPC has been left with two empty seats on their rate setting committee.  They have selected one man from academia and one from industry, which should be a nice complement for the Committee. Andrew Sentance hails from British Airways while Professor Tim Besley joins from the London School of Economics.  Besley is seen as a very well respected UK academic while Sentance presently serves as Chief Economist and Head of Environmental Affairs at the airliner.  Although not much is known about Besley's views on monetary policy, Sentance submitted an article to the UK Times in June expressing concerns about the global economy and how a rate cut may be needed further down line if the UK economy continues to weaken.  Even though he thinks that the need for a rate cut is an outside chance, his letter indicates which way he leans.  Overall, it is encouraging that the Bank of England is moving back towards full-staff.  However, with Besley joining in September and Sentance coming on in October, the MPC will still be left with seven members at the August meeting.  Therefore, if there are to be any changes in interest rates, do not expect them until the fourth the quarter at the earliest.

Japanese Yen
The Bank of Japan will have the market's undivided attention tonight.  Traders are holding breath for the central bank's interest rate decision.  For the first time in six years, the market expects the Bank of Japan to raise interest rates by 25bp.  There are three possible scenarios that could unfold.  The monetary policy committee could opt to leave interest rates unchanged which would clearly be yen bearish.  They could also raise rates by 25bp and signal more rate hikes over the next few months, which would be clearly yen bullish.  However, the third and more likely scenario is not as clear cut.  That is, the Bank of Japan could raise rates by 25bp, but then indicate that one rate hike does not mean that more will follow.  This would be similar to what happened when they ended quantitative easing.  They had offset a potential yen rise by clarifying that the end of QE did not mean the end of ZIRP.  At the time, the Japanese Yen actually sold off instead of rallying.  Although, this would be slightly different since there is an accompanying interest rate increase, it is quite a possible that we could see a similar move in the currency as yen bulls express their disappointment. 

Kathy Lien is the Chief Currency Strategist at FXCM.