Dollar Bounces as Data Mixed
It was a strange week in FX land as the greenback bounced back from last weekâ�,��"�s fall not necessarily on its own merits, but rather because data from Europe was even more negative than the results from United States.  On the surface US housing sector appeared to have stabilized and even improved as both Existing and New Home Sales figures recorded much better than expected readings, but looking below the headlines the facts showed a different story. New Homes sales were revised markedly down - their eighth such revision in a row. Durable goods meanwhile also shocked to the downside contracting â�,�“0.5% vs. 0.5% expected. On the flip side, lower gasoline prices which have declined by more than 30% in the past six weeks boosted consumer confidence with both CCB and U of M surveys registering better than forecast readings. Finally personal income increased as forecast but personal spending  did not â�,�“ a clear sign that the US consumer is now more focused on debt service rather than spending. This is a fact that the market may not fully appreciate as we approach the critical Christmas season.  Overall, there was little to suggest in last weekâ�,��"�s data that the US economic slowdown has been averted and greenbacks gains appear to have been more a function of disappointment in the pace of growth in the Euro-zone rather that any sense of optimism about US  economic prospects. In short the buck found it self in the unusual role of being the anti-euro.

Employment remains the critical component of the dollar bull â�,��"soft landingâ�,��" argument. If the US does in fact engineer a soft landing employment growth should remain steady.  Though hardly spectacular, any result within the 100K level will keep that thesis alive. A sharp surprise to the downside however will once again revive talk of a recession and possible Fed cut by early next year â�,�“ all quite negative prospects for greenback. Thus as is so often the case in the currency market next week comes down to Fridayâ�,��"�s NFP.

Euro: What Reason for Hike?
In the upcoming week the ECB is expected to raise rates another 25 basis points to 3.25%, but last week the apprehensive nature of the latest economic releases from Euro-land raised questions amongst currency as to how many more rate hikes will the Central Bank put into effect. For example, while the headline reading from the key event of the week - the IFO survey - beat consensus estimates the futures expectations component dropped below 100 on fears of ever higher interest rates, increase in taxes and persistently high energy costs sending euro down as a result. Furthermore, perhaps most damaging of all was the unexpected flat reading in German Retail sales which were anticipated to increase by 0.8%. Although French consumer data was better, the frustratingly lackluster consumer demand from EZâ�,��"�s largest economy will dampen any growth estimates going forward. Finally,  EZ CPI data also printed below estimate coming in at 1.8% versus 1.9% expected â�,�“ comfortably under ECBâ�,��"�s own 2% target.  As we noted on Friday â�,��"the need for further hikes now becomes problematic. Although ECB officials have repeatedly stated that they are concerned not only with inflation but with liquidity levels as well, the dour retail numbers may give them pause in considering just how much further they should  tighten.â�,�

Aside from the expected rate hike and the post decision conference traders attention will be focused on the string of PMI reports in both Manufacturing and Service sectors which should continue to post expansionary results. Additionally, EZ Retail Sales will either confirm or refute the notion of consumer weakness in the Euro-zone. In the end however, unless EZ data prints significantly worse than expected, FX trade next week will key off US reports with NFP deciding the ultimate direction of the move.

When Will Yen Turn?
Although Japanese data suggested steady growth, Yen buyers were nowhere to be found as USD/JPY rose 150 points throughout the week to close out Friday at 118.01. The pair made temporary moves lower on commentary from both Japanese FinMin Omi and Vice FinMin Fujii saying that the decline of the Yen against the Euro was a â�,��"bit rough.â�,� This is the second time that Japanese officials have used such language to describe EUR/JPY movements and suggests that the 150 EUR/JPY level is one which the worldâ�,��"�s central banker do not wish to see crossed.â�,� However, interest rate differentials continued to dominate trade, but as we noted last week, â�,��"national CPI rose as expected by 0.3% but the Tokyo numbers were more muted jumping only 0.4% versus 0.6% forecast. Although price increases may have been smaller than anticipated, the fact of the matter is that Japan has now recorded four consecutive months of positive inflation data and real short interest rates in the country are now negative. Furthermore, should this pace of price growth continue into the end of the year rates will only become more negative creating an unsustainable dynamic for the BOJ. With Prime Minister Abe now firmly ensconced in the seat of power and political transition over, Japanâ�,��"�s monetary policy makers may finally feel free to act unhampered by political considerations which could mean the possibility of another rate hike before the year end.â�,�

The central focus of this week will be on the results of the Tankan survey. With the figures anticipated to post above 20, Yen could find some relief on evidence of broad based growth, which would give the BOJ leeway to proceed with monetary policy tightening. Additional  event risk comes on Monday with labor cash earning, as wage acceleration could provide stimulus to boost the consumer spending that has been so weak. Finally, traders will be looking to directionally gauge comments from BOJ MPC member Muto, who will speak in Kyoto on Wednesday.

Faulty Data Sinks Sterling
Discovery of erroneous inflation calculations by the UK Office of National Statistics and indications of a divided BOE sent GBP/USD about 300 points lower this week. The ONS estimate of annual inflation in export prices was slashed to 0.6% from 3.8% originally reported, and subsequently pushed the calculation of overall inflation in the UK from 3.4% to 2.2%. Additionally, annual nominal GDP was revised down to 4.8% from 6.0%. The reductions in the figures severely limit the prospects for a rate hike this year by the Bank of England, as CPI over 3% and nominal GDP at 6% had been the operating assumption of the MPC up to now. Meanwhile, the markets heard very different opinions regarding the state of the UK economy this week. First, BOE Deputy Governor John Gieve implied in an interview with the Financial Times that he had considered voting for a rate increase at the September MPC meeting only to be followed next day by BOE MPC member David Blanchflower, who has already gained notoriety as the sole dissenter at the August 2006 meeting, stating that he thought unemployment may begin to tick higher and as a result, the risks to the economy are weighted more towards a slowdown. While the data released in the past week would normally warrant more bullishness on Cable, such as better-than-expected retail sales and an expanding housing market, the revisions to CPI overshadowed all putting a serious damper on rate expectations for 2006.

The BOE policy meeting will certainly be the focus of next week, however, if the MPC decides to hold rates as expected at 4.75%, traders will have to wait until later in the month to see the minutes for further insight. It already appears that there are sharp contrasts in opinion by the central bankers, and the BOE perhaps more than any other central bank remains data dependent.

Swissie Gets Squeezed
As all the majors, the Swiss franc suffered losses against the greenback last week. While Swiss data posted lower than expected results, the figures were hardly indicative of an economy in a rut. The UBS Consumption Indicator printed  below expectations at a 5-month low of 1.708. However, consumer spending is still supportive as the labor market remains strong. The most important  Swiss economic indicator of the month, the KOF leading indicator survey, came in slightly weaker than predicted at 2.32 versus 2.42 consensus.  This is the second period in a row of month over month declines, and although the figure remains near multi year highs, the deceleration of momentum bodes poorly for any Swissie bulls still counting on a 50 basis point hike from SNB. As we said last week, â�,�With very little reason to be aggressive on the rate front, the Swiss franc is likely to continue to suffer from interest rate differential disparity and will only rally if the outlook for global growth becomes markedly more defensive.â�,�

Economic data in the week going forward could further Swissie losses, as CPI is anticipated to stagnate and PMI is predicted to slow, limiting the possibility of an aggressive 50 basis point hikes in the near-term but  markets will certainly pay attention  to  SNB board member Philipp Hildebrandâ�,��"�s speech on Thursday for any dovish or hawkish clues to future policy.

Boris Schlossberg is a Senior Currency Strategist at FXCM.