US Dollar
Surprisingly strong US economic data has sent the US dollar higher once again.  However the rally has been limited as traders and analysts question whether the economic strength exhibited in today's reports can repeated.  US consumers spent voraciously in the month of July buying everything in sight from cars to air conditioners, fans and summer clothing in the second warmest July in over 100 years.  More specifically, retail sales increased 1.4 percent last month, which was the strongest pace of spending since January.  Import prices also increased 0.9 percent in July while business inventories increased by a more than expected 0.8 percent in June. The fact that spending remained so strong in the face of higher gasoline prices and mortgage payments should keep some traders positioned for another rate hike by the Federal Reserve this year.  Fed fund futures are currently pricing in only a 58 percent probability of a quarter point rise in interest rates by the end of the year with the percentage shrinking to 25 percent for the September meeting.  The latest data suggests that we are on track to see solid GDP growth in the third quarter.  However spending will not be enough to convince the Fed to resume its rate hikes and instead inflation will be key.  In the week ahead, we are expecting both the producer and consumer price reports along with the Philly Fed Manufacturing Index, Housing Starts, Building Permits, Industrial Production, Leading Indicators and the report on Net Foreign Purchases of US Securities.  Individually these reports can move markets, but collectively, they have the potential to drive the EUR/USD out of its latest trading range.  The EUR/USD is sitting at a key support level and it will be next weekââ,¬â"¢s data that determines whether we make a run for 1.25 or rebound back towards 1.30. 

Euro
Strong US reports has kept the Euro under pressure despite mostly positive European data.  Both French and Italian GDP came in stronger than expected in the second quarter, rising by 1.2 percent and 0.5 percent on quarterly basis.  In fact, the expansion in France is the fastest pace that we have seen in six years.  Consumer spending as well as increased capital exports is suspected to be the primary drivers of growth.  France is clearly catching up to its larger German neighbor which puts it on track to hit 2-2.5 percent GDP growth this year.  Yet even though the growth figure was strong, the inflationary indicator in France was weak.  Consumer prices fell 0.2 percent last month, keeping the annualized pace of growth at 1.9 percent. Both German and Italian consumer prices were right in line with expectations.  Todayââ,¬â"¢s reports validated the European Central Bankââ,¬â"¢s need to raise interest rates earlier this year but do not give much clues as to how much further they will raise rates in the future.  In the week ahead, we continue to expect a heavy dose of Eurozone data including GDP figures for Germany as well as the Eurozone as a whole along with the regionââ,¬â"¢s CPI, industrial production and trade balance figures.  However the number one thing that we will be looking for is hawkish comments from ECB officials.  Since the Fed paused earlier this week, we have not heard any comments from the ECB reiterating their plan to raise interest rates.  Perhaps they are on vacation, but we are still on the lookout.

British Pound
The British pound continues to remain under pressure after the foiled terror plot.  With no significant economic data released over the past two days, politics remains the main theme in the UK markets.  As we said yesterday, jittery citizens make for jittery markets.  Turning to economics however, the UK housing market is continuing to show signs of stabilization.  The Financial Times reported this morning that house prices increased from 5.2 percent to 5.4 percent in the month of July.  Although the economic impact of the heightened security risks in the UK is unclear, for the time being, the economy is still holding steady.  Next week, economics will play a much more dominant role on the British pound as we anticipate a long list of key releases.  This includes producer and consumer prices, leading indicators, employment data, average earnings, retail sales and mortgage lending reports. 

Japanese Yen
Traders have beaten down the Japanese Yen as preliminary second quarter GDP figures come out much weaker than expected.  Originally predicted to grow by 0.5 percent, the Japanese economy only expanded by 0.2 percent in Q2 with growth in the first quarter revised down from 0.8 percent to 0.7 percent.  This is the second consecutive quarter of slower growth, which decreased the annualized pace of expansion from 2.7 percent to 0.8 percent * the weakest amongst the G7.  A fall in exports, rise in imports, decline in inventory and housing market investment were all to blame.  The Japanese Yen also experienced a significant amount of volatility in the second quarter, which is sure to have also played a role in the weaker external demand.  However, the one glimmer of hope is that domestic demand and capital expenditure are recovering nicely, which suggests that the outlook is still very promising for the Japanese economy.  Although traders were disappointed by the more neutral comments from the Bank of Japan Governor Fukui after their decision to leave interest rates unchanged, they are still expected to raise interest rates again later this year. 

Kathy Lien is the Chief Currency Strategist at FXCM.