US Dollar
With London markets closed for a summer bank holiday, trading has been unusually thin today.  After a week of strong gains, the US dollar sold off on the back of easing oil prices.  We have also seen some dollar bulls square positions ahead of what could very well be bearish economic data tomorrow.  We start the week off with US consumer confidence which will give us a sneak peak at how well the consumer has been holding up for the past month in the face of a slowing housing market and still relatively high energy prices.  If consumer confidence falls significantly after the two back to back months of improvements that we saw in June and July, the outlook for further economic growth could be very negative.  Even though we are expecting non-farm payrolls later this week, at the current moment, retail sales and the consumer is far more important.  Past data have shown that the labor market remains steady while inflationary pressures are subsiding as oil prices drop back near $70 a barrel.  This leaves growth the primary worry of the Federal Reserve and the consumer their key focus.  Even though oil and housing have been a problem for some time, the US consumer continues to keep economic growth positive.  Just earlier this month, retail sales were reported to be the strongest since the beginning of the year.  It has kept dollar bulls optimistic but it remains questionable how much longer this can continue for.  Aside from confidence, the minutes from the rate debate at the last FOMC meeting will also be released tomorrow.  If you recall, that was same meeting that the Federal Reserve kept interest rates on hold for the first time in over 2 years.  We will be looking for more insight on why the Fed paused and whether they felt that the risks were weighted more towards further weakness in the economy or a gradual resumption of stronger economic activity.  Either way, we do not think that the minutes will shift the marketââ,¬â"¢s expectation for another pause in September.  Oil prices have fallen significantly over the past few weeks and with it, so has price pressures.  The fear that inflation would be uncontrollable was the number one reason why the Fed kept on raising interest rates especially under the new Chairman who wanted to prove that he was an inflation fighter.  With that fear diminished significantly, the Fed can take a much more relaxed approach to monetary policy. 

Euro
It is clear that range trading remains the predominant theme in the EUR/USD as the currency pair holds above its rock solid 1.2750 support level.  Trading has been extremely quiet with nothing more than money supply data released this morning.  M3 was weaker than expected, but remains at fairly decent levels which should not alter the European Central Bankââ,¬â"¢s stance on monetary policy.  The highlight of the Eurozone economic calendar is the ECB rate decision on Thursday.  Even though the central bank is expected to keep interest rates on hold, traders are still looking for hawkish comments from President Trichet to confirm the central bankââ,¬â"¢s plans to raise interest rates again later this year.  Recent economic data has been indicative of slower growth and the drop in oil prices is certainly not encouraging for Euro bulls. This will give the ECB some breathing room and encourage Trichet to be more relaxed about raising interest rates.  However, if inflation pressures do become a concern again, ECB board member Bini Smaghi has already let the markets know this past weekend that the central bank will be prepared to react.  Over in Switzerland, monetary policy is far clearer.  SNB President Roth was very bullish on the economy and said that even though inflation is under control, the risks to price stability exist which suggests that they will be raising rates by at least another 25 basis points this year. 

British Pound
Stronger house prices helped to drive gains in the British pound today.  According to Hometrack, house prices increased by an annualized rate of 3.9 percent this month, which is the fastest pace of gain in close to two years.  Over the past few months, we have been seeing more positive reports from the housing market.  The hope is that the US housing market will follow the same path as the UKââ,¬â"¢s which is only a mild contraction followed by stabilization.  UK markets were closed today for a bank holiday and even though the markets reopen tomorrow, there is no data scheduled for release.  This will leave the value of the British pound dependent upon the behavior of the US dollar and the Euro.  The increasingly tight range for the GBP/USD make the currency pair ripe for a breakout and this weekââ,¬â"¢s heavy US calendar has just what it takes to deliver that.  Thin pre-holiday trading could exacerbate any movements in the currency market.

Japanese Yen
For the second day in a row, the Japanese Yen is weaker against most of the major currencies except for the US and Canadian dollars.  Market News International has been reporting that the Bank of Japan could delay their next rate hike until the following year given the recent softer inflation report.  Whether this may be true will be confirmed by this weekââ,¬â"¢s data.  We are expecting a number of key reports starting with the jobless rate and household spending.  The unemployment rate is expected to improve, but even though the labor market is becoming tighter, we have yet to see that filter into higher wages or increased spending.  A drop in spending and depressed wages will offset any bullishness from a lower unemployment rate.

Kathy Lien is the Chief Currency Strategist at FXCM.