US Dollar
The combination of weak European economic data and hawkish comments from the Federal Reserve has helped the US dollar regain strength after the EUR/USDââ,¬â"¢s attempt to close above 1.29.  The 1.29 to 1.2950 zone has been stiff resistance for the currency since May and judging from the price action over the past two days, it continues to be.  The US economic calendar this week is relatively light until Thursday, but this did not stop surprisingly hawkish comments from Federal Reserve Presidents Guynn and Moskow from moving the US dollar.  Both Guynn and Moskow raised concerns about the risk of accelerating price pressures and indicated that the central bank may need to raise rates again in the future to keep inflation in check.  However, with Guynn leaving the Federal Reserve soon and Moskow a non-voter this year, they do not have much power to sway the FOMC. Yet, with the dollarââ,¬â"¢s weakness becoming exhausted, traders were eager to look for a reason to take profits on dollar shorts and their comments fit the bill.  There is still a less than 30 percent chance that the Federal Reserve will raise rates again over the next few meetings especially as oil prices stabilize around $72 a barrel.  Looking ahead, the 1.2750-1.2950 range in the EUR/USD should continue to hold for the remainder of the week.  Summer holidays in Europe and Japan have kept trading extremely thin.

Euro
The Euro tanked after a dose of disappointing economic data today.  The German ZEW survey of analyst confidence fell from 15.1 to -5.6, a complete collapse that caught the market by surprise.  The consensus forecast was for only a mild drop to 11.4, but instead confidence slipped to the lowest level since 2001.  The ZEW survey for the Eurozone also fell from 18.1 to 1.3.  Analysts felt that the current conditions were better than the market expected, but they were extremely pessimistic about future conditions and there is no surprise why.  We have long said that as the World Cup effect fades, reality will set in and the Eurozone will be forced to look internally for growth.  The combination of tensions in the Middle East, increased terror alert levels at airports around the world, a strong Euro and political turmoil in Germany makes the future extremely murky.  Domestic demand has always been lackluster in the Eurozone and the latest risks do not make it any easier for Europeans to part with their hard earned cash.  However, the ZEW survey has recently had a weak correlation with the German IFO survey of business confidence.  The IFO survey is a more reliable barometer of how the economy is doing or how businesses are actually feeling rather than how analysts perceive the outlook for local businesses.  Therefore, although the ZEW suggests that the IFO will also be weak this month, the decline may not be as sharp as the 20 point drop that we saw today.  Meanwhile French GDP increased a less than expected 1.1 percent in the second quarter while new orders in the Eurozone dropped by a more than expected 2.5 percent in the month of June.  The impressive growth that we saw in the second quarter is beginning to fade and the high level of the Euro is certainly not helping.  This suggests that European Central Bank will most likely forgo an interest rate hike at the end of the month and wait until September to see if the economy improves before raising rates again.

British Pound
The lack of any UK economic data over the past two trading days has forced the British pound back to the familiar ââ,¬â€œ which is to have its valuation determined by the movements of the Euro and the US dollar.  The surprising deterioration in European economic data has pushed the British pound higher against the Euro while the recovery in the US dollar has led to a mild depreciation of the GBP/USD.  The current state of the UK economy and the Bank of Englandââ,¬â"¢s stance is quite clear, so the projections of the future valuation of the pound is really dependent upon how well the Eurozone economy holds up, whether the ECB decides to raise interest rates in September and whether the US Federal Reserve is truly done with raising rates this year.  The softer than expected consumer spending and inflation reports that we have seen from the UK indicate that the Bank of England will probably keep interest rates at its current level for the foreseeable future.  Even though Eurozone data is deteriorating, the ECB is still expected to raise interest rates again this ââ,¬â€œ it is just a matter of timing.  Therefore weakness in the EUR/GBP could remain limited.

Japanese Yen
The US dollar is stronger against the Japanese Yen as last weekââ,¬â"¢s weaker tertiary activity index is followed by last nightââ,¬â"¢s weaker all activity index which increased by 0.1 percent, compared to the marketââ,¬â"¢s forecast for a 0.2 percent rise.  Like European data, Japanese economic data is beginning to show signs of moderation and will probably continue to unless we see a resurgence in global economic activity or subsiding geopolitical tensions that take oil prices back below $70 a barrel.  However much of the yen weakness against the dollar can be attributed to demand for yen crosses.  We have seen major moves in CAD/JPY, GBP/JPY and AUD/JPY over the past two days.  Even though EUR/JPY and CHF/JPY are slightly lower today, they are simply working off the extreme rally they had the day prior.  EUR/JPY hit a fresh record high yesterday.  Later this week, we are expecting inflation numbers from Tokyo and the country as whole ââ,¬â€œ the market is still looking for any reasons that may convince the Bank of Japan to raise rates again this year.  Strong CPI numbers would be needed to put a floor under the Yenââ,¬â"¢s recent slide.

Kathy Lien is the Chief Currency Strategist at FXCM.