Dollar Back in the Game
The dollar managed to hold its own this week despite a spat of disappointing data, however, the decline in EUR/USD was relatively tame compared to the massive rally thatâ�,��"�s accumulated over the past two months. Greenbackâ�,��"�s 150 point over the course of the week was nothing to scoff at however, as much of the action was wrought on Friday when volatility surged. The culprit? The notorious US NFP release, which posted higher than expected at 132K. Markets were unsure where to take EUR/USD on the release until Treasury Secretary Henry Paulson stepped in and applauded the NFP reading. Mr. Paulsonâ�,��"�s comments saying that the payrolls figure was â�,��"very, very good newsâ�,� for the economy sent the dollar rocketing 100 points higher. Will a solid NFP release be enough to keep the US Fed neutral? While traders will likely need to see more proof that the economy is not in the process of heading towards recession0, markets are now more likely to divert rate cut expectations until later in 2007.

With a FOMC meeting on the agenda, which trumps almost any other economic release out of the US, markets will be highly focused on the event in search of commentary, as the central bank is widely expected to hold rates at 5.25 percent. Will Bernanke and Co. continue to harp on inflation and avoid the topic of an economic slowdown, or worse, a bonafide crash landing? Will they send out the same statement as they did in October? Signs that the Fed is still wearing rose colored glasses may be the short-term remedy to cure the greenback of its recent weakness, and EUR/USD bears will be out in full force to take advantage on Tuesday.

ECB Hike a Non-Event for Euro
Signs started to emerge that the euroâ�,��"�s multi-month, 850 point rally was exhausted as the European Central Bankâ�,��"�s long awaited 25 basis point hike barely caused a stir in the markets. In fact, EUR/USD dropped almost 50 points over the following 24 hours, despite staunchly hawkish commentary by ECB President Jean-Claude Trichet, who left the door open tofurther monetary policy tightening in 2007. So why the 1% drop in the euro? While the release of stronger-than-expected US NFPâ�,��"�s may have led traders to believe the US Fed wonâ�,��"�t be ready to cut rates quite yet, euro bullsâ�,��"� rush to price in this past weekâ�,��"�s hike may have left the EUR/USD overvalued for the event. With the carry trade differential narrowed down to 175 basis points, growth and inflation data on both sides of the Atlantic will be of the essence to the markets, as the reports will make or break price action for the euro in coming months.

Although the week going forward is relatively light on data for the Euro-zone, the German ZEW sentiment survey may set the tone for the week. As of late, optimism has started to sour ahead of the 2007 VAT hike, but with this monthâ�,��"�s result anticipated to improve, outlooks for the retail and services sectors may get a boost ahead of the holiday season. Meanwhile, inflation-related data later in the week is expected to underpin the ECBâ�,��"�s concerns regard second round oil price effects. If the data falls in line with estimates, EUR/USD bulls may be able to continue to take over the markets.

Yen Down and Out
As we noted on Friday, â�,��"dismal Japanese economic news continues to leave traders wondering if the Bank of Japan can really follow through on their crusade to normalize rates. The final reading of Q3 GDP was revised down to 0.3%, putting the annual rate at 0.8% - the lowest since Q4 2004 â�,�“ while the Eco Watchers â�,��"man-in-the-streetâ�,� survey dipped below the 50 boom/bust level to 48.9.â�,� Additionally, capital spending reports showed that expenditures have slowed while consumers remain extremely pessimistic, which has little hope of translating into consumption growth.  Nevertheless, as recently as last Tuesday, BOJ policy maker Atsushi Mizuno reiterated that soft Japanese spending would not dissuade the central bank from raising rates, and as a result, yen remained bid for most of the week until the GDP upset. Unfortunately, traders are going to have to wait until December 18th for the BOJâ�,��"�s target rate announcement to see just how hawkish and optimistic the central bank is feeling.

Yen longs may be seeing red next week, as nearly all of the Japanese economic data set to be released is anticipated to post weaker. The only figure expected to improve â�,�“ consumer confidence â�,�“ is still estimated to remain below the 50 level, signaling a more pessimistic sentiment among households. The picture doesnâ�,��"�t look good for USD/JPY pair, but as weâ�,��"�ve seen previously, all it takes a bit of hawkish commentary from the BOJ to send yen reeling.

Cable Falls Victim to Lackluster Fundamentals
A string of mixed economic data forced the previously unflappable pound to retrace over half of last weekâ�,��"�s gains. Though many analysts had argued that GBP pairs had reached extremely overbought levels, few traders had the wherewithal to place substantive short orders prior to Mondayâ�,��"�s weak PMI and Retail Sales data. When they finally did, the Pound saw little relief ahead of falling 250 points through Fridayâ�,��"�s close. Tuesdayâ�,��"�s weaker-than-expected Industrial and Manufacturing Production figures contributed to the overall bearish tone, as both headline numbers posted unexpected declines through October. Of course, this was little compared to the sharp drops seen on mid-day Friday trade, with the Pound losing nearly 200 points in less than 2 hours on reported profit taking. Whether or not Cable can recoup this weekâ�,��"�s losses will greatly depend on upcoming fundamental news releases.

The upcoming week should provide considerable volatility to GBP pairs, with key inflationary data set to dominate otherwise economic release-heavy days of trading. Due near the European open on Monday morning, government officials will report on the levels of producer price inflation. Along with Tuesdayâ�,��"�s CPI figures, these price inflation numbers will have considerable influence over the future of Bank of England interest rates. Given that the Pound has strengthened on expectations of higher domestic yields, any negative surprises could lead to extensive retraces of previous gains. Not to be outdone, Thursday and Fridayâ�,��"�s Employment and Retail Sales figures could likewise pose great influence over the BoEâ�,��"�s outlook on domestic growth. Risks may remain to the downside for the Pound, with positive surprises unlikely to spark the same torrid advances seen in recent weeks, while disappointments could cause further retraces.

Swissie Clears Its Schedule Before SNB Decision
Fundamentally and technically, this past week has been a strong one for the Swiss franc.  Against the benchmark dollar, the Swissie spent most of the period hovering just north of 1.19 resistance, and even chalked up a fresh 19-month high when an anti-dollar run pulled the pair briefly below 1.1880.  The only viable release available from the Swissieâ�,��"�s borders during the whole week was Novemberâ�,��"�s jobless report. According to the State Secretariat for Economic Affairs, seasonally adjusted unemployment fell to 3.1 percent, besting expectations of an unchanged figure and the lowest the rate has been in nearly four years.  Strong labor statistics supply the most consistent argument that the economy will hold up going into the first half of the year.  As it stands now, GDP is on pace to finish out the year at its fastest pace of expansion in nearly six years.  However, the erosion of a few key indicators, like Leading Indicators, SVME manufacturing and consumer spending, have jeopardized this optimistic outlook.  If SNB President Jean-Pierre Rothâ�,��"�s predictions come true though, the consumer base may pick up any slack in exports.  Roth said in a statement two weeks ago that unemployment could fall below 3 percent early in 2007.

This employment outlook from Switzerlandâ�,��"�s central banker may play a vital role in the coming policy decision scheduled for Thursday.  Futures tied to short-term rates have fully priced in an a 25 basis point hike at the December meeting since the previous rate hike in September. In fact, looking at more distant contracts, a 2.25 percent rate by the end of the first quarter also seems a shoo-in.  Beyond March however, the outlook becomes fuzzy.  This is likely caused by cautious outlooks for export growth and inflation going into the new year.  In its September quarterly assessment, the SNB lowered its inflation expectations to 1.1 percent for 2007 and 1.6 percent for 2008.  Expectations for economic growth and price pressures (and ultimately interest rates and Swissie strength) hinge on the central bankâ�,��"�s updated outlook for the economy released just after the policy decision.

Boris Schlossberg is a Senior Currency Strategist at FXCM.