US Dollar
There were a number of key US data released this morning, but the US dollarââ,¬â"¢s reaction to them was extremely erratic.  It seemed as if anyone who wanted to go long dollars was already long, and everyone else was looking for a reason to sell dollars.  The first two morning reports, producer prices and the Net foreign purchases were more positive for the dollar, but the attempted rally against the Euro quickly reversed as soon as the EUR/USD currency pair came within an armââ,¬â"¢s length of the 1.25 price level.  Headline producer prices fell by 1.3 percent in the month of September, but if you strip out the energy component, producer prices including food increased by 0.6 percent.  Core prices, which exclude both of the more volatile food and energy components also increased by 0.6 percent, which validates some recent comments by Federal Reserve officials that inflation still remains a problem.  Discounts on auto prices kept core prices subdued for the past two months, but now that the discounts are over, prices have increased once again.  However, traders tend to hold back their reaction to PPI until they see CPI, which will be due for release tomorrow.  The record high in net foreign purchases reported for the month of August, should have also been positive for the US dollar, but with Russia planning to diversify its reserves in the months to come and Chinaââ,¬â"¢s chest of reserves reaching $1 trillion over the next few days, it is hard for traders to believe that these numbers will not begin to suffer going forward as diversification picks up pace.  Every piece of strong data that we have seen from the US has been filled with ifs and or buts which makes it hard to be too bullish.  The only piece of data that the dollar had a meaningful reaction to was industrial production.  Reports that production activity fell for the second consecutive month sent the dollar tumbling.  An intraday day low was reached against the Euro at the London session close and the dollar quietly recuperated its losses for the remainder of the US session.  So ultimately if we had to sum the day up, it was a lot of activity that led to almost nothing.  Most of the majors are ending the day unchanged against the dollar as we look ahead to tomorrowââ,¬â"¢s consumer price release.  Traders will want to see CPI confirm the rise in core prices that we saw in PPI today.  The EUR/USD is trying to bottom, so if core prices fail to rise significantly, we could see another layer of cement applied to the recent EUR/USD bottom. 

Euro
The Euro continues to hold the 1.25 level against the US dollar despite a round of more bearish Eurozone data.  Even though analysts are more optimistic about current conditions, the prospect of another interest rate hike by the European Central Bank and an increase to the VAT tax next year is more than enough to take the ZEW to the lowest level in 13 years.  However, the market has not reacted much to the ZEW survey since it has had a very weak correlation with the business sentiment index over the past few months.  Like the rest of the world, the Eurozone has also been hit by falling oil prices.  Consumer prices remained stagnant in the month of September, bringing the annualized rate of growth down from 2.3 percent to 1.7 percent, well below the ECBââ,¬â"¢s 2 percent target.  Yet, core prices did tick higher which may be a reason why the central bank is still concerned about inflation.  The one piece of good news was the jump in industrial production.  Manufacturing activity appears to have boomed in the month of August, which keeps the door open for a strong IFO report later this month. 

British Pound
The British pound extended yesterdayââ,¬â"¢s gains following a stronger increase in core consumer prices.  Todayââ,¬â"¢s inflation reports from the UK, US and Eurozone clearly indicates that although the drop in oil prices is indeed pressuring prices globally, its impact has only been limited.  However we stop short of being overly optimistic because core prices tend to have a delayed effect and as a result, they can fall as well in the months to come.  We have already seen airliners begin to drop their prices.  In terms of the UK, retail prices hit an 8 year high, confirming the need for the Bank of England to keep a close eye on inflation.  Tomorrow we are expecting the minutes from the monetary policy meeting held earlier this month.  Given the recent comments from the Bank of England, the minutes should contain a more hawkish tone.  In addition, the labor market should remain tight and the risk is to the upside for wage growth and average earnings. 

Japanese Yen
Following Russiaââ,¬â"¢s announcement on reserve diversification, the Japanese Yen continued to firm against the majors.  Data released last night was mostly yen positive, but that only added fuel to a market that was looking for more gains in the yen.  Unfortunately, the grind lower in yen crosses has been very gradual because of the new threat that North Korea may test another nuclear weapon and the high interest rates traders would need to pay to be long yen and short other currencies such as the New Zealand dollar, US dollar and British pound.  Interest rates have been one of the primary reasons why the yen has fallen so significantly over the past few months.  Carry is always king.  Meanwhile there is not much on the Japanese calendar tonight aside from the minutes from last monthââ,¬â"¢s Bank of Japan meeting.   BoJ members are likely to have retained their hawkish stance.

Kathy Lien is the Chief Currency Strategist at FXCM.