US Dollar
As expected Federal Reserve officials kept the benchmark interest rate at the current 5.25 percent, for the second month, leaving the potential for further rate hikes in the near term in subsequent statements.  Although it does shed a light of optimism for the greenback, the probability of a rate hike scenario continues to dwindle with each and every session.  Every market participant knows central bankers are looking for positive data in reinforcing the notion of growth in the world’s largest economy.  However, reports have been less than exemplary, showing nothing but declines and weakness for the past quarter.  The notion includes this morning’s MBA mortgage applications which rose 2 percent.  Although positively gaining on the week, the overall trend for applications has been in line with the longer term decline that has been shaping up in the recently weaker housing sector.  Subsequently, it coincides with downward revisions in both the housing sector and consumer spending, both which reported less than expected increases for the month.  But acting as the perpetual last straw, Chairman Ben Bernanke and fellow FOMC members admitted that “inflation pressures are likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations and the cumulative effects of monetary policy actions.”  Coupled with a housing slump and the evidence is quite clear backing the notions of an end to the tightening policy for almost the past two years.  Now, following the recently bearish trade deficit figures, the announcement may dictate that dollar bearishness is finally upon us.  However, the notion also requires that additional economies sport higher and more positive figures, like in Germany and Japan.  With growth tepid in both regions, much like the rest of the world, one could ask whether or not the Fed decision was indeed in response to the US based slowdown or protection from a more global downturn, keeping the dollar supported for the moment.

Euro
European economic data was virtually nonexistent on the day, but that didn’t stop the domestic currency from taking a slight lead on the greenback during the New York session.   The only pertinent piece of data was in regards to Italian industrial orders and the unemployment rate.  The industrial orders figure confirmed the dip seen in the declining industrial production figure seen but two days ago in the overall region.  According to the report, industrial orders rose better than expected for the month of July.  However, with the previous month’s 1.2 percent decline, the overall annualized figure decreased to 8 percent when the consensus was asking for an 11 percent rise.  However, unemployment ticked slightly higher, giving euro bulls some encouragement on the day.  Expected to rise at a 7.3 percent annualized figure, the report actually declined to 7 percent as it seems that export firms may be adding to their forces in response to heightened demand.  In either case sentiment continues to remain of near term rate hikes, which in turn is spurring current market speculation.  Traders are boosting futures contracts on momentum from the beginning of the week as policy makers continue to back a steady rise in interest rates in order to curb inflation in the region.  Against the US and Japanese single currencies, the interest is even heightened as investment pools are seeking out higher returns against looser monetary policy in the world’s top two economies.  As a result, euribor forward rate interest is pricing in a likelihood of at least another 25 basis points in the near future.

British Pound
Money supply figures and public finance data were released on the day, but more focused on by the wider market were the Bank of England minutes.  Although expected to show an overwhelming bias for the recent rate decision, the unanimous decision told a story of further concern over inflationary pressures following the recent pickup in consumer demand.  With retail sales reports rising at the fastest pace in almost two years, central bankers continue to remain watchful of rising prices at both the consumer and producer price levels as production steadies a bit.  Additionally, the notion had central bankers releasing rhetoric backing the thought that inflationary pressure were likely to continue throughout the year end as unemployment is expected to continue its incremental downtrend.  All in all, the minutes have boosted sterling prospects as futures traders continue to support a move in the benchmark repurchase rate by another 25 basis points in November.  Subsequently, buyers were also seen in the market for the British pound following a technical break of the currency against the European euro.  Although the underlying price action, for the moment, is consolidating, further strength in the pound is expected as economic data is likely to keep its positive pace.

Japanese Yen
Disappointing yen enthusiasts, but not by much, were the convenience store sales figures for the month of August.  Granted, the figure did decline once again, falling 1.8 percent on an annualized comparison, the dip was less than the previous 5.2 percent decline seen in the previous month.  As a result, the figure may be somewhat more positively considered as compared to the lackluster results witnessed in the Tokyo and Nationwide department store sales figures.  However, the optimistic suggestions are likely to be overshadowed by the results of the Liberal Democratic Party election results held in the overnight.  Winning a convincing victory for the ruling LDP, Chief Cabinet Secretary Shinzo Abe is set to replace the incumbent Prime Minister Junichiro Koizumi after garnering a high majority in the Japanese party.  The question still remains, nonetheless, of whether the official will continue to push for higher levels of reform in the world’s second largest economy, in line with the plans of his predecessor.  The notion is likely to include .any political measures that may conflict with current policy, which may add to recent weakness in the Japanese currency.  After appointing three top officials to his cabinet, the official is set to take office next Monday.

Kathy Lien is the Chief Currency Strategist at FXCM.