Retail Runs the Dollar
How strong is the US economy? Thatâ�,��"�s the key question facing the currency market as the EUR/USD now trades near the psychologically important 1.2500 level. This weekâ�,��"�s US Advanced Retail Sales and University of Michigan survey went a long way towards making the dollar bullâ�,��"�s case.  While the headline numbers looked bearish at first glance dropping -0.4% versus 0.2% expected, they masked underlying strength. Ex-gasoline Retail Sales actually rose 0.6% indicating that the US consumer was alive and kicking and since the US consumer comprises 70% of the US economy US GDP growth for Q4 may not be as tepid as market initially thought. The Retail Sales news was further enhanced by much better than expected U of M numbers which printed at 92.3 with the outlook component jumping to a yearly high. Overall the end of week data suggested that despite the contraction in housing US economy continues to perform well and consumption should remain firm into the critical Christmas season.

Yet as quickly as they can brighten fortunes can fade as well. Clearly the above estimate numbers from last week we driven by the massive decline in the price of oil and gasoline. But oil may be hitting a near term bottom. With early snow storms occurring in Buffalo Chicago and Detroit, it may be time to say goodbye to Indian summer and hello to an early winter which is sure to wreak havoc with oil prices especially if  there is even a hint of geo-political risk. In short, with EUR/USD now trading near critical support levels we wonder if there is enough strength in US data to propel the greenback further.  Next week Empire and Philly may weigh on trade again but the marquee event of the week may well be the TICS report.  With US Trade deficit hitting record highs of -$69 Billion the US can ill afford another poor showing from foreign capital inflows. If the number prints low once again talk of structural problems will return to the markets. If however,  it surprises to the upside, the greenback longs may be emboldened to test the 1.2400 figure.

Euro - Back to the Anti-Dollar Status
The euro reverted to its old habits of trading primarily off US news as modestly positive data and continued hawkish rhetoric by the ECB provided little support for the single currency.  EZ GDP printed in line rising 0.9% on a quarter over quarter basis while German Industrial Production continues to impress jumping 1.9% versus only 0.3% expected. The news in the Industrial sector bodes well for the overall EU economy which is much more production-centric than its US counterpart. With the EUR/USD lower, the demand for European goods is only likely to rise contributing to a potential upside surprise in Q4.

Next week is once again relatively empty of any market moving event risk. The ZEW survey is expected to improve marginally to -21 from -22 reading the month prior.  Given the fact that the ZEW now rests at a six year low a better than expected bounce is not out of the question  but the ZEW typically has only a fleeting influence on trade in the pair. Euro-zone Industrial Production and CPI numbers may also spark some interest amongst traders but in all likelihood next weeks trading â�,�“ assuming no exogenous geo-political risk â�,�“ will center on US data as well as technical flows around the critical 1.2500 figure.

Geopolitical Risk Weakens Yen Once Again
Though the Japanese markets were closed on Monday for holiday, news that North Korea had tested nuclear weapons over the weekend sent Yen plummeting. Once traders returned, USD/JPY movements became even more violent as price edged closer to the psychologically important 120.00 level. Central bank action added to volatility when Bank of Japan Governor Fukui said, â�,��"I cannot rule out the possibilityâ�,� when he was queried by reporters about the chances of another rate hike from the BOJ  before the year end. As we said last week, â�,��"The BOJ concluded its two day policy meeting by unanimously maintaining short term rates at 0.25%. However, Governor Fukuiâ�,��"�s ever so subtle comments signaled that the Japanese central bank may be finally ready to commence a tightening program as the countryâ�,��"�s economy continues its strong recovery from decade long bouts with deflation and multiple recessions.  With real interest rates still negative in Japan, the BOJ has to move sooner rather than later to curb liquidity and tonightâ�,��"�s press conference signals that the monetary authorities may be finally ready to address this issue."

On the economic front, Domestic CGPI results backed the possibility of a rate hike before year end as the measure of inflation rose more than anticipated at 0.3% from August, taking the annual rate up to a 25 year high of 3.6%. Meanwhile, the Eco Watchers survey printed above the 50 boom/bust level for the second month in a row suggesting that Japanese economy continues to expand at a healthy pace. As weâ�,��"�ve mentioned previously, â�,��"Over the past two years upturns in the Eco Watchers reports have been accurate forecasters of future yen strength. While this indicator can certainly falter this time, it nevertheless indicates that a turn in USD/JPY may be coming soon."

Next week, the primary focus could remain on geopolitical risk, as the UN Security Council approved sanctions on North Korea for its reported nuclear test, which the Communist regime considers an â�,��"act of warâ�,�. Markets will also be looking towards the minutes of the September Bank of Japan MPC meeting, along with comments from BOJ Governor Fukui on Thursday. Should Fukui make similar statements as he did last week, Yen could find the impetus to regain strength.

Precipitous Declines Sap Pound Strength
The past week saw Pound plunge amidst weaker inflation figures and overall greenback strength. Producer prices in the UK dropped more than expected in September, with input and output falling 1.8% and 0.3%, respectively, on a monthly basis. The declines were the result of weaker raw material prices, including oil, and highlights that the much-feared inflation seen in prior months was likely due to energy price acceleration. Meanwhile, the Visible Trade Balance widened more than estimated and sparked fears that any additional rate hikes by the BOE would cause further deterioration in the export competitiveness of UK industry and will widen the trade deficit even more.

Hawkish comments by BOE Governor Mervyn King turned the tables on recent economic data, however, and helped fuel a small rally in the pound mid-week before subsequently backing down. Mr. King expressed his skepticism regarding the latest batch of inflation data, noting that the declines in September were â�,��"temporaryâ�,�.  The news capped sterlingâ�,��"�s slide as traders interpreted his words to mean that the MPC will seriously consider another rate hike before the year end which would raise rates UK short term rates to 5.00%.

Despite Mr. Kingâ�,��"�s belief that weaker inflation is only temporary, CPI and RPI releases could extend Cable losses this week. Additionally, GDP and housing growth are anticipated to tick lower. However, the main event risk lies in the minutes from the October BOE meeting, where market participants will be looking at which side the central bankers are more heavily weighted: hawkish or dovish? Should the balance lean towards the hawks and wage growth figures surprise to the upside on Wednesday, indicating that price pressures in the UK economy have spread to the labor market, GBP/USD could finally see a rebound.

Cross Flows Crush Swissie
The Swiss franc suffered the most extensive losses against the greenback once again this week as cross flows sucked the life out of the Swiss currency. EURCHF carved out a four-week high of 1.5961 as the Swiss National Bank downgraded growth forecasts and as Reuters noted a study from the SNB that acknowledged that the Swissie was attractive for carry trades. With inflation in Switzerland well below the central bank target of 2% at 1.5% and economic expansion beginning to slow, it is becoming increasingly likely that monetary policy tightening will come to an end in December with a 25 basis point hike. Meanwhile, the ever-hawkish ECB considers European rates accommodative, so the 150 basis point carry trade differential is more likely to widen in favor of the Euro, creating a particularly bearish Swissie environment.

With mixed economic data set to be released next week, the Swiss franc could continue to suffer as producer and import prices are anticipated to pull back in line with declines in energy prices during the month of September. However, signs that domestic and foreign demand remain buoyant could be signaled upon release of adjusted real retail sales and the trade balance and create an opportunity for USD/CHF shorts to benefit.

Boris Schlossberg is a Senior Currency Strategist at FXCM.