US Dollar
The lack of any US economic data has led to quiet trading in the majors today with a mild extension of yesterdayââ,¬â"¢s dollar weakness.  Over the past week, we have see further evidence that the US economy still faces major risks ahead following sharp deteriorations in many economic releases.  Inflationary pressures on the other hand continue to subside as oil prices fall to six month lows.  With both growth and inflation slowing, there is no reason for the Federal Reserve to veer away from their plans to keep interest rates on hold for the foreseeable future.  In fact, the market agrees as Fed fund futures are pricing in a less than 20 percent likelihood for another rate hike this year. Next weekââ,¬â"¢s economic reports should drive the point in even further as housing market releases dominate the calendar.  Existing and new home sales are due for release ââ,¬â€œ both of which are expected to reflect a deflating bubble (existing home sales is on Monday).  Aside from housing, we will also be watching the consumer confidence report on Tuesday and the personal spending report on Friday.  Consumer spending is the only pillar that is keeping the US economy supported and consumer confidence will give us a better take on whether this will continue to provide support in the near future.  A drop in confidence will raise the concern for a fall in retail sales next month, but at this point, analysts are looking for a rise in confidence.  This is possible as lower prices at the pump will allow consumers to breathe a sigh of relief after having to deal with sky high gasoline prices and oil related surcharges throughout the summer.  Although the outlook for the housing reports suggest that we are setting up for a dollar negative week, a rise in confidence would negate that. On a short term basis, the sell-off in the US dollar is looking overdone.  A bounce is possible before we get a continuation of the downtrend and confidence can be the catalyst for that bounce. 

Euro
The Euro is stronger today against the US dollar, but the currency pair has given back most of its earlier gains.  Economic data released this morning was very promising with all releases surprising to the upside.  French consumer spending jumped 3.3 percent in the month of August while industrial new orders increased 1.8 percent in the month of July.  Even the Italian trade balance total swinged back from negative to positive in the month of July.  However the most important release improvement was the increase in the Belgian Business Survey. The Belgian Business survey of manufacturing conditions is a tiny index for a tiny country but for over the past six years, the index has had an 80 percent positive correlation with the German IFO survey of business confidence. The faster expansion in Belgium suggests that the IFO index will probably only moderate slightly next week, if at all. Earlier this week, the sharp drop and negative reading in the German ZEW survey of analyst sentiment caused the EUR/USD to test its range lows. Yet for over the past six years, the ZEW has only had a 23 percent positive correlation with the IFO. What does this mean? It suggests that the BNB is far more reliable than the ZEW as a leading indicator for the IFO report, Germany's most important economic releases. If this relationship holds, we could see Euro strength dominate next week.  Aside from the IFO, there are many other key releases on the Eurozone economic calendar to watch for including the German CPI report, unemployment change and retail sales. 

British Pound
The British pound was yesterdayââ,¬â"¢s biggest winner against the US dollar so it is no surprise to see the currency pair give back some of its gains in todayââ,¬â"¢s quiet trading.  The only piece of data released was car production for the month of August.  Another back to back drop has contributed to some of the profit taking that we have seen in the British pound today against both the Euro and US dollar.  The week ahead appears far more exciting as we expect a number of housing market related reports, the second quarter current account report, the CBI distributive trade surveys and Gfk Consumer confidence.  Second quarter GDP is also on the calendar, but given that it is the third release, no changes are expected.  Most reports are predicted to show further stabilization of the UK economy even though this will not be enough reason for the Bank of England to raise interest rates again.  The primary reason for their surprise rate hike in August was inflation fears.  Those fears should now be subsiding and as such so will the BoEââ,¬â"¢s need for urgent action. 

Japanese Yen
After yesterdayââ,¬â"¢s strong rally in the Japanese Yen, the currency has given back a portion of its gains against everything expect for the Australian dollar.  Economic data released overnight was mixed with the third quarter BSI index coming out stronger than expected but the All industry index surprising to the downside.  Over the past week, the Japanese economic calendar has been light and the currency has primarily benefitted from carry trade liquidation.  Although we believe that this will continue to remain a predominant theme in the markets, the week ahead brings forth many key economic releases.  This includes reports on retail sales, inflation, the labor market and consumer spending.  Unfortunately the recent performance of the Japanese economy has been far more impressive.  As such, disappointments are more likely in the week ahead.  However when it comes to the yen, we will not only be watching the weekââ,¬â"¢s economic reports, but also the trend of investment flows.  Yuan revaluation continues to support the Yen as the currency hit a new record high after US Treasury Secretary Paulsonââ,¬â"¢s visits with President Hu Jintao.

Kathy Lien is the Chief Currency Strategist at FXCM.