US Dollar
It has been quite a week in the currency markets.  The resilience of dollar bears proved to be too strong for bulls to handle as the key levels in the currency market (1.25 in EUR/USD and 120 in USD/JPY) continued to hold.  Unlike yesterday where we saw broad dollar weakness, the lack of any US data today led to mixed price action.  The dollar continued to weaken against the British pound and Commodity currencies, but clawed back against the Japanese Yen and Swiss Franc.  The EUR/USD on the other hand ended the day unchanged, reflecting the possible indecision in the markets.  The main focus of the day was on North Korea and OPEC.  China has toughened up its stance and has banned bank transactions between the two countries.  There have been reports that North Korea apologized for the tests, but the fact that his apology was reported by a South Korean new agency that cited a diplomatic source in Beijing, which is quite a number of layers, makes it questionable.  In addition, the market continues to doubt whether OPEC members will actually follow the cartelââ,¬â"¢s production cuts.  The fear is that if oil prices continue to remain low, some of the smaller members would feel compelled to make up lost revenue by increasing production once again.  Russia has already announced that they have no plans to back OPECââ,¬â"¢s decision and will not be reducing oil production.  There is an uncle point however.  The Financial Times reports that the previous strength in oil prices has encouraged many members to overspend in increasing production.  In order to meet its current pace of spending, Saudi Arabia needs oil prices to trade at a minimum of $38 a barrel which compares to $15 a barrel in the mid nineties.  Their costs continue to grow by 20 percent a year, which means that if growth continues at that level, by 2010 oil prices would need to be at $65 a barrel for them to breakeven.  With the spread currently at $18 a barrel, down from a peak of $40 in July, Saudi Arabia is still making money, but the lower the price of oil goes, the more concerned they will be and the harder they will push for the major cuts.  Oil prices are now trading at the lowest level in 11 months, which may help the dollar start next week on a firmer footing.  There are three main events that we are watching in the US next week which are Durable Goods, GDP and the Federal Reserve rate decision.  Although no changes are expected in US interest rates, as usual, the FOMC statement could provide some clues on how far away we may be from another change in interest rates.   More specifically, we will be looking for whether they put greater emphasis on the drop in headline inflation or the rise in core prices. 

Euro
After yesterdayââ,¬â"¢s strong breakout, the Euro is virtually unchanged against the US dollar.  The single currency has held onto nearly all of yesterdayââ,¬â"¢s gains on a day that was devoid of meaningful economic data.  Switzerland reported stronger than expected producer and import prices but the Swiss franc has lost value against every single currency except for the Japanese Yen.  Over the past week, we have seen more evidence of possible slowing in the Eurozone economy, which would give the central bank reason to pare back their plans to tighten interest rates.  It is with near certainty that the central bank will be lifting interest rates at their next meeting, but if economic growth does not accelerate and oil prices remain low, core prices will eventually begin to reflect the softer inflation pressures.  As such, the ECB may not hint at more hikes until next year.  In the week ahead, there are a number of speeches by ECB officials.  They are all expected to reiterate the central bankââ,¬â"¢s hawkish stance, but we will be looking for any cracks in the commentary.  The most important piece of data due for release is the German IFO survey.  After the major disappointment in the ZEW survey, traders are looking for a retracement in the IFO as well. 

British Pound
Unlike the Japanese Yen and the Euro, the British pound managed to score another day of gains against the US dollar thanks to a strong GDP report.  Growth in the third quarter increased by 0.7 percent, which is above the 0.6 percent market consensus and erases some of the doubts about the UK economic recovery that came after yesterdayââ,¬â"¢s drop in retail sales.  Adding to the poundââ,¬â"¢s gains were comments by UK Treasury Balls who signaled that the government was still concerned about wage pressure by emphasizing the need for wage settlement restraint.  This should keep speculation about another rate hike by the Bank of England intact.  Handicapping if and when the BoE will move rates again should be the main focus of sterling traders going forward.  The economic calendar in the week ahead is extremely light which means that the GBP/USD should revert back to tracking the Euro, but with one caveat - any dollar weakness will likely be exacerbated in the GBP/USD as compared to the EUR/USD while any strength will be minimized.  

Japanese Yen
Weaker than expected all industry activity in the month of August has sent the yen tumbling against the majors.  The cool comments from Bank of Japan Governor Fukui over the past few days has pushed back expectations for an interest rate increase by the central bank before the end of the year even though just last week Fukui said that he would rule out the possibility of a rate hike before then.   His latest stance involves closely monitoring the developments in the economy and prices before making a decision on how to conduct monetary policy.  Looking ahead, the Japanese economic calendar is also light but with a few key pieces of data due for release next week including the trade balance, CPI and retail sales.  The main focus of the market is the massive carry trades that have built up.  According to the BoJ, there are approximately JPY12 trillion worth of short yen trades globally and according to the Nikkei paper, there are $1.6 trillion worth of foreign loans extended by Japanese banks.  Even though the BoJ denied their concern about the massive carry trades, both the central bank and the holder of short yen carry trades should be worried.

Kathy Lien is the Chief Currency Strategist at FXCM.