Dollarâ�,��"�s Sudden Rally
This week was shaping up to be much like last  with price action mind numbingly slow for the first four days of market activity. It appeared that we would end the week close to where we started as the standstill between bulls and bears remained unresolved. However, as we approached the G-7 meeting, dollar firmed considerably first breaking the 1.2800 figure and then 1.2700 early Friday morning.  The one major piece of economic news during the week â�,�“ the ISM Services report -was dollar supportive as it  printed  at 57.0 versus 55.1 expected. However, looking beyond the headlines the report revealed serious deterioration in the individual components and could hardly be the cause of the dollar bull run.

Rather, dollarâ�,��"�s sudden strength was most likely due to technical factors as the selling in EUR/JPY cross weighed on the EUR/USD. Once the key levels were breached stop orders triggered further downside moves. Additionally traders expected to see rebalancing language out of the upcoming G-7 meeting over the week-end that would call for further strengthening of Asian currencies versus their European counterparts and sold the EUR/USD ahead of the event. Finally, comments from new Treasury Henry Paulson that he was "very much in favor of a strong dollarâ�,� helped fuel the dollar move even more.

Next week, the Trade Balance numbers on Tuesday and Retail Sales on Thursday will likely be the key economic events to drive order flow. While the Trade situation is unlikely to improve given the stubbornly high oil prices, if Retail Sales show stronger results than the market expects, the greenback may push down to the 1.2600 figure as fears of a serious slowdown in US economy will recede.      

Euro Correction Continues
Euro lost more ground against the greenback this week, though the move appeared to be more of a correction rather than the start of a major decline. The economic news was neither particularly weak nor remarkably strong with PMI Services report missing to the downside (57.1 vs. 57.5) but Euro-zone Retail Sales rising a surprisingly robust 0.6% vs. -0.3% expected. Furthermore Industrial demand didnâ�,��"�t appear to have suffered from the high exchange rates as both German Factory Orders and Industrial Production handily beat expectations. Overall the news suggested  all systems go for another ECB rate hike within two months , but with the market having factored in another 50bp in hikes by year end, there was little fresh impetus to get long euros.

As the unit comes in near the 1.2500 level, however, it should see considerably more support as bargain hunters and Central Banks looking to diversify reserves will likely crowd on the bid. With the underlying interest rate story in the Euro-zone remaining hawkish, the euro weakness should be temporary. Only a sharply deteriorating outlook in EZ growth  or a revival of the prospect of Fed rate hikes is likely to change that market dynamic.

Next week the Euro-zone calendar remains void of any significant data and the pair is far more likely to trade offUS newsflow rather than European releases. Further weakness in the pair is certainly possible, but as it nears the 1.2500-1.2600 zone support for single currency should become substantially stronger.      

Crosses Yield Yen Strength
The yen had its way with the market this past week, with crosses such as GBP/JPY and EUR/JPY sent diving lower ahead of the start of the G-7 meeting. The Japanese currency was sent for a tailspin when German Deputy Finance Minister Mirow commented that the meeting of central bankers and finance ministers in Singapore would include discussion of the yenâ�,��"�s weakness. Furthermore, as we said last Friday, â�,��"the BOJ left rates unchanged [as expected] at 25bp andâ�,�¦Governor Fukui offered little new information stating simply that â�,��"we will adjust interest rate levels slowly while keeping a close eye on economic and price moves ahead.â�,� This gradualist approach is consistent with BOJ statements in the past, although the fact that Governor Fukui did not completely rule out the possibility of more rate hikes before the year end suggests that Japanese monetary authorities remain flexible to the idea of further tightening.â�,� Economic data, such as a 16.6% surge in CAPEX and the emergence of the EcoWatchers Survey figure into expansionary territory at 50.2 lent fundamental strength to the yen and signaled increased confidence amongst businesses and consumers alike.

The Japanese economic calendar for next week is full of anticipated improvements in indicators such as consumer confidence, the trade balance, the tertiary index, and more importantly, Q2 GDP. However, the result of Domestic CGPI should prove to be key, as yen bulls will be looking for inflationary results, especially as policy tightening isnâ�,��"�t quite off the table for the BOJ yet. Additionally, any news flow regarding comments ahead of the G7 meeting is likely to add to volatility in the crosses.

Precipitous Decline for the Pound
Cable tallied roughly 400 points worth of losses throughout the week as UK data indicated that the BOE would require far more incentive to raise rates again followed the central bankâ�,��"�s surprise hike in early August. The MPC decided to hold rates at 4.75% last Thursday, but with no statement or press conference, traders were forced to wait for publication of the minutes on September 20th. The recent contraction in CPI and weak consumption trends were likely to have kept BOE hawks at bay, but ever-buoyant house prices have left many market participants questioning the possibility of 5.00% before the end of the year.

Political concerns left the pound sterling vulnerable as well, with PM Tony Blair expressing his intent to step down within the year. Although this does not come as a surprise, Blairâ�,��"�s reluctance to pinpoint an actual date may have caused more damaged and uncertainty.

Producer prices set to be released at the beginning of this week should get the markets primed for CPI reports to be posted on Tuesday. Furthermore, wage price figures on Wednesday and retail sales on Thursday could help signal how broad based growth is in the UK economy. Should the data prove to be overwhelming indicative of inflationary pressures, the markets could start to price in an October hike and would benefit the GBP/USD longs who took a beating last week.

Carry Trade Weakens Swissie
The carry trade proved to be an omnipresent force once again this week, sweeping the Swissie 200 points lower against the dollar as it became clear that the SNB would need far more impetus to narrow the 375 basis point differential between the US and Switzerland. CPI posted in line with expectations at a tepid 0.2% in the month of August. With the annual rate of inflation at 1.5% - lower than the SNB target of 2% - the probability that the central bank will come down hard with a 50 basis point hike on September 14th becomes less and less likely. Adding to the case was the slower than anticipated Q2 GDP reading of 0.7%. The annual pace of economic growth also decelerated, posting at 3.2% from 3.5% as exports dwindled. The level of foreign trade is still high, however, and GDP remains above the central bankâ�,��"�s 2.5% estimate, which should keep the SNB on track to reach 2.00% by the end of the year.

With a rate hike likely, inflationary figures expected rise, and industrial production data anticipated to gain, the upcoming week should be Swissie positive. The fate of the Swiss franc, however, will probably ride on the SNBâ�,��"�s policy assessment and target rate announcement. If the central bank has a more hawkish tone and implies the potential for a 50 basis point hike at their December meeting, USD/CHF bears could be in their glory.

Boris Schlossberg is a Senior Currency Strategist at FXCM.