Dollar Doesnâ�,��"�t Move
Another week full of range bound listless price action as implied volatility contracted to near record lows with EUR/USD carving out a  whopping 100 point range for all five days of trade.  On the economic front, the news was generally dollar bullish with Advance Retail Sales rising 0.2% versus 0.0% expected and U of M sentiment bouncing to 84.0 as price of crude declined by more than $15/bbl off the top and consumers saw some relief at the gasoline pump.  With impending doom and gloom failing to materialize despite the sharply contracting housing market, the market began to warm up to the greenback on the assumption that the US economy will merely decelerate modestly rather than tip into a recession.

Next week, the FOMC meets to render its decision on rates but almost no one expects the US monetary authorities to tighten.  Yet while the FOMC may be a non event â�,�“ the TICS report which precedes it on Monday could have a meaningful impact on trade if the number exceeds estimates either way.  Last week, the record Trade deficit hardly moved the pair, but thatâ�,��"�s because the US economy is far more dependent on capital flows rather than trade flows. If TICS print significantly lower than the $70 Billion expected, it will once again spark fears about the structural condition  of the United States.  As long as foreign capital continues to flow into dollar denominated assets the greenback will likely remain buoyant, but if the financing is withdrawn, the market will have very little patience with the buck.

Euro Stays Stagnant
Yet one more week of virtually no data from the Euro-zone as the calendar contained only second tier releases with the exception of EZ CPI figures. Inflation â�,�“ or rather lack of it â�,�“ turned out to be the key theme of the week as core CPI numbers printed a surprisingly tame reading of 1.3% versus 1.4% expected. The sudden drop in oil prices has traders questioning the resolve of the ECB to maintain the thumbscrews to monetary policy.  While almost all ECB officials continue to make hawkish comments, doubts persist as to both the necessity and the desire of European monetary authorities to ratchet rates higher in the face of markedly lower oil prices and a deceleration in EZ consumer demand. That above all caused the euro to weaken on Friday as the unit ended the week essentially where it started.

Next week the Euro-zone calendar contains ZEW and Industrial New Orders â�,�“ nether of which should have more than a temporary impact on trade.  With little meaningful  news flow save for a possible fallout form the weekend G-7 meeting the unit is likely to tread water but we will repeat last weekâ�,��"�s observation which still stands, "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."

Yen Woes Intensify
The week started horribly for yen bulls and became worse as it progressed. On Monday, news that Machine orders fell a whopping -16.7% versus only -5.4% forecast sent yen sharply lower as traders feared that the global slowdown in demand was starting to impact Japanâ�,��"�s export sector.  After the unit stabilized it was hit again Friday as Tertiary Industry index â�,�“ a measure of the service sector â�,�“ dropped -0.2% instead of printing at 0.0% as expected. Service sector activity has fallen in four out of the last six months prompting fears that the BOJ rushed to judgment in ending its ultra loose monetary policy this summer. The dour economic outlook was further reinforced by a sharp downward revision in the LEI release which was marked down materially to 27.3 from its initial reading of 40.  As we wrote on Fridayâ�,� Talk on dealing desks is now centered on whether Governor Fukui may have to â�,��"pull a Hayamiâ�,� â�,�“ a reference to the former BOJ Governor who had to reverse course on rates in 2000.  While we seriously doubt that BOJ will be forced to roll back rates to zero, tonightâ�,��"�s data clearly suggests that the chances of yet another rate hike before the year end have declined substantially."

With next Monday off for holiday it will be interesting to see if the yen can stage a bounce after the G-7 meeting. At present the prospects seems dim as the G-7  is unlikely to offer any aggressive language on revaluation while on the economic front Merchandise Trade surplus and All Industry report are expected to show further deterioration. With little fundamental news to help stage a rally, the yen has only positioning to rely upon. With yen shorts on the CME now climbing by a massive 30K from last week, any further USD/JPY gains are likely to be capped.

Pound Pushes for 1.8900, But Falters
A stack of positive data early in the week propelled Pound to reach a high of 1.8918, but an empty slate during the later half of the week and a push of dollar strength limited GBP/USD gains. Signs of continued inflationary pressures reiterated arguments that another rate hike by the Bank of England before year end was a clear possibility. While PPI did contract, CPI and house price figures came in higher than expected and signaled widespread price pressures in the UK economy. Furthermore, jobless claims tightened by 3.9K, and while average earnings were not as buoyant as anticipated, the potential still remains for a pass through to wage growth.

Next week looks to be somewhat thin on data compared to last week, but the release of the BOE minutes will be the center of attention for Cable traders, as market participants will look for insight into directional bias of Governor Mervyn King and his fellow policy makers. Additionally, CBI Industrial Trends may pick up for the second month in a row, indicating the domestic industrial sector is on track for improvement. A continuation of hawkish rhetoric from the BOE will be necessary for GBP/USD bulls to prosper this week. What is more important, however, is that the UK central bank sound more biased towards tightening than the US Fed, as the FOMC will meet and release a rate decision on Wednesday.

Sour Times for the Swissie
As weâ�,��"�ve mentioned over the course of the past few weeks, the carry trade continues to weaken Swissie as the 350bp differential between the US and Switzerland serves as a major detriment to the Swiss franc. This past week proved to be no different, despite the Swiss National Bankâ�,��"�s decision to raise their target rate as expected by 25bp to 1.75%. While the SNB made it clear that further gradual policy tightening will continue as long as growth is in line with expectations, inflation well under the 2% target at 1.5% and downwardly revised outlooks for 2007 and 2008 essentially erased the possibility of a 50bp hike at the December meeting. Other economic data, such as industrial production, was lackluster as well and did not bode well for an economy whose export sector is crucial to growth.

The only thing that may be able to save the Swissie this week is strongly hawkish commentary from SNB Vice-Chairman Niklaus Blattner, who speaks at the Swiss Exchange in Zurich on Wednesday. Economic data isnâ�,��"�t predicted to be impressive, as the trade balance is likely to narrow to 0.8B from 1.42B in July. A surprise to the upside in Adjusted Real Retail Sales could give CHF a boost, but the most likely scenario in which USD/CHF bears would profit is if the US Fed suggests a dovish bias and if US indicators post disappointing results.

Boris Schlossberg is a Senior Currency Strategist at FXCM.