US Dollar
With no US economic data released today, the dollar has started the new week on a softer footing.  Recovery was the main theme as the greenback climbed higher against all of the majors.  This week, we have a rather light economic calendar with only second tier data due for release.  Most of the reports are expected to validate Bernankeââ,¬â"¢s hint at a pause last week, starting with tomorrowââ,¬â"¢s consumer confidence and existing home sales reports.  Analysts are only forecasting a small dip in confidence from 105.7 to 104.5 in July, but based upon the most recent non-farm payrolls release, tensions in the Middle East and rising prices at the pump, the risks are tilted toward a bigger drop in confidence.  Unhappy consumers suggest that uncertainty and higher costs could pinch the pocketbooks of consumers, which may lead to another month of weakness in retail sales.  Meanwhile with the US economy hinging upon the stability of the housing market, existing home sales will be equally important.  Unlike builders, homeowners are more reluctant to offer discounts and upgrades to spur sales.  As a potential sign of how the report may come out is a recent a survey by the Wall Street Journal that indicated an increase in inventories on the market and a decrease in house prices across the nation.  Orlando has been the biggest hit with a 397 percent increase in housing inventory compared to a year ago.  Tampa and Miami both saw a 100 percent increase in inventory while sales in California have been slumping every month.  It is slowly becoming a buyers market where time is on the purchaserââ,¬â"¢s side and we expect to see that reflected in the housing market report.  Even if both consumer confidence and existing homes sales surprise to the upside, it does not change the fact that the outlook for the US economy is still uncertain.  With $400 billion worth of adjustable rate mortgages (ARM) or 5 percent of total mortgages readjusting to market rates for the first time this year, homeowners could see their monthly mortgage payments increase by an average of 25 percent.  In addition, another $1 Trillion worth of ARM are scheduled to reset next year.  Unless we see both releases double expectations, their positive impact on the marketââ,¬â"¢s rate hike expectations should be limited.  Meanwhile, the Canadian dollar was actually a bigger focus today as retail sales took a surprise move into the red.  Originally expected to rise by a modest 0.1 percent after solid gains for the past two months, sales actually fell 0.6 percent in May.  After Governor Dodge warned of tough times at the last monetary policy meeting, economic data has been getting progressively worse.  

Euro
Despite strong economic reports, a recovery in the US dollar has sent the Euro lower.  Industrial production in the Eurozone rose 2.3 percent in the month of May, which was far stronger than the marketââ,¬â"¢s forecast for a 0.2 percent drop.  Looking ahead, todayââ,¬â"¢s Belgian manufacturing survey could shed more light on the possible outcome of Wednesdayââ,¬â"¢s German IFO report.  Even though the Belgian survey is a tiny index, it tends to be a strong leading indicator of economic activity in the region as a whole.  The index dipped from 10.6 in June to 5.6 in July, which is still consistent with growth. Taken in combination with the much weaker German ZEW survey released last week, the IFO survey is poised for a dip after hitting a 15 year high in the month of June.  Even if it does slip from 106.8 to 105, it is still an extremely strong reading that is indicative of solid economic conditions. Overall, we expect Eurozone economic data this week to continue to support an interest rate hike by the European Central Bank next Thursday.  

British Pound
After four days of back to back gains, it is no surprise to see pound bulls take advantage of the quiet day to take profit on their positions.  UK economic data was slightly softer this morning with the CBI retail sales survey falling from 9 to 7 in the month June.  The divergence between the CBI report and last weekââ,¬â"¢s strong retail sales report suggests that if it were not for the World Cup, domestic sales would have been weaker.  This indicates that even though the UK economy is recovering, the process is still fragile and as such, the Bank of England has good reason to sit on the sidelines for at least another month.  There should not be much to change this view with an extremely light UK economic calendar this week. 

Japanese Yen
The Japanese Yen is showing signs of bottoming against many of the majors as the rallies in most of the yen crosses are becoming stretched.  There was no Japanese data released overnight and none are expected until Wednesday morning in Japan.  The lack of any catalyst will allow US data to dictate the direction for the USD/JPY currency pair for most of the week.  If US data disappoints, we could see USD/JPY move below 116.  Meanwhile this is a big week for Australia with PPI, CPI and leading indicators due for release.  Producer prices came out strongly last night, rising by 1.6 percent in the second quarter.  This was far higher than the 1.1 percent forecast and was driven primarily by a surge in oil prices.  Even though Australia is a net energy exporter, their main export is coal and when it comes to crude oil, they are a net importer.  Therefore they too have been hit by the rise in crude prices.  The inflationary pressure is expected to spill into consumer prices as well - the CPI report is due Wednesday morning Australia time.  These reports support the marketââ,¬â"¢s view that the Reserve Bank of Australia will opt to reawaken their tightening cycle later this year. Meanwhile the contrast between the economic conditions in Australia and New Zealand are becoming increasingly clear.  The Reserve Bank of New Zealand is expected to leave interest rates unchanged this week as well for the remainder of the year. 

Kathy Lien is the Chief Currency Strategist at FXCM.