US Dollar
The US dollar has become practically immune to the continual disappointments in US economic data.  We started the week off with a sharp drop in existing home sales and today, we saw another fall in the sales of new homes along with a weaker than expected durable goods report.  The signs of a slowdown in the US economy are clear, but the extent of the slowdown is not.  This is the main reason why the US dollar has remained strong. Traders are still holding out for the possibility of another rate increase this year by the Federal Reserve.  However given the recent trend of economic data and oil prices, we doubt that there is enough evidence to convince Federal Reserve Chairman Ben Bernanke to change his mind.  His recent silence since the last monetary policy meeting has caused some of his critics to back off.  To resurrect the talk of another rate hike in the near future would at the same time resurrect speculation about his credibility.  The lower price of oil has helped to alleviate inflationary pressures while the deterioration in the housing market raises the risk of a housing market driven recession.  Taking a closer look at todayââ,¬â"¢s data, new home sales fell 4.3 percent, which is the second slowest increase in home sales this year.  Like yesterdayââ,¬â"¢s existing home sales report, inventories jumped significantly and in this case, hit a new record high.  At this rate, prices are going to have to come down significantly.  Although prices of existing homes have fallen, the average median price of a new home has increased from $229,200 last year to $230,000 this year.  Durable goods also fell by 2.4 percent in July, which was far sharper than the -0.5 percent forecast.  However, the details of the report were not as discouraging with orders excluding transportation increasing by a more than expected 0.5 percent.  Overall, this is still indicative of decent, albeit slowing growth, which is the best way to characterize the current state of the US economy.  The EUR/USD will probably continue to range trade until we see more evidence of how US consumers have been behaving.  Once the consumer tips over, the dollar should follow as well. 

Euro
German business confidence moderated slightly in the month August, but not as drastically as the ZEW survey suggested.  The IFO index fell from 105.6 to 105 in the month of August, which was better than the marketââ,¬â"¢s 104.8 forecast.  Business owners felt that the current market environment was relatively stable but the outlook called for a bit of weakness.  The Belgium manufacturing survey once again proved to be a far more accurate indicator of how the IFO survey would turn out.  With the IFO still hovering near its record highs, the German economy could continue to perform well in the third quarter.  Other reports from the Eurozoneââ,¬â"¢s biggest economy were equally encouraging.  Second quarter GDP increased by 0.9 percent, compared to a previous quarterly rise of 0.7 percent.  Import prices also increased by a more than expected 1.2 percent in the month of July.  After a handful of weaker reports, this latest piece of data, which tends to be very important keeps the possibility of another rate hike by the European Central Bank  in September on the table.  Germany is still slated to release their CPI report tomorrow which will help to confirm whether inflationary pressures remain a concern.

British Pound
The British pound continues to fluctuate within a very tight trading band against the US dollar.  The tighter the range, the greater the likelihood of a sharp breakout.  Judging from recent economic reports, it is difficult to tell which direction the breakout will be.  Only minor economic data was released today.  Second quarter business investment increased by 1.7 percent, while car production fell by 3.7 percent in July. The Financial Times is also reporting that the UK may face less pressure from gas prices as they ease supply increases thanks to the scheduled completion of gas pipeline projects from Norway and the Netherlands. Tomorrow we will have much more meaningful data, namely second quarter GDP.  The economy is predicted to have expanded by a slightly faster pace in the second quarter compared to the first. 

Japanese Yen
Tonight, everyoneââ,¬â"¢s focus will be on Japanese consumer prices.  The Yen has rallied slightly against most other major currencies except for the US dollar in anticipation of a relatively decent CPI print.  However the state of inflation or deflation in Japan is not very clear. The July corporate services price index was released this morning and it indicated that prices fell 0.1 percent versus expectations for a flat report.  The CPI report is critical in deterring how close or far away the Bank of Japan is from raising interest rates.  USD/JPY remains relatively bid because the interest rate differential between the US and Japan  remain very high in the USââ,¬â"¢ favor.  With both central banks at status quo for the moment, investors are happy just reaping the benefits of carry.  If however, the data suggests that the BoJ may have to act sooner rather than later, we could see a break lower in USD/JPY.

Australia and New Zealand
Even though the US dollar rallied, prompting weakness in both the AUD/USD and NZD/USD, the performance of the two were very different, just like the current state of the respective economies.  Overnight, Australia released much stronger than expected house prices, which were more than double expectations and suggests that the Reserve Bank of Australia could raise interest rates again this year.  In contrast, New Zealandââ,¬â"¢s trade balance was much weaker than expected.  This divergence has also led to sharp gains in AUD/NZD.

Kathy Lien is the Chief Currency Strategist at FXCM.