US Dollar
According to the US producer prices released this morning, inflation is back, which may keep the Federal Reserve on hold for far longer than most traders may have been anticipating.  The US Labor Department reported a 2 percent monthly rise in producer prices with a 1.3 percent monthly gain in core prices.  On both a headline and a core level, prices grew by multi-decade highs, which raise the concern of whether consumer prices may follow suit next month.  With producer prices dropping 1.6 percent in October, last weekââ,¬â"¢s disappointment in consumer prices was not completely surprising.  Therefore the sharp upside surprise in producer prices last month should have some pass through effect on consumer prices over the next one or two months.  PPI increased significantly for 3 reasons; the first is the 17 percent rise in oil prices that we saw in the month of November, the second is a sharp snapback in vehicle prices and the third is simply a rebound after the large drop that we saw the prior month.  Looking ahead, the data indicates that core consumer prices could recover over the next few months, which may come to the aid of the US dollar.  Housing starts also increased last month, but the downtrend in building permits offset the optimism about the housing market.  For the time being, the sector still remains vulnerable.  Despite the upside surprise in US PPI and hawkish comments by Federal Reserve President Fischer, the market quickly erased earlier gains as this morningââ,¬â"¢s strong German IFO report continued to resonate in the markets while oil prices reversed.  There is no significant data due for release tomorrow, but it will only be a brief break before we get a ton of data on Thursday and Friday.  For the time being, we see no reason for the EUR/USD to break out of its most recent 1.3050-1.3360 trading range.

Euro and Swiss Franc
Despite a strong currency and a recent interest rate hike, German business confidence surged from 106.8 to 108.7, which is the indexââ,¬â"¢s highest reading since the first ever business confidence print in January 1991.  The size of the surprise (1.9 points) was also significant.  We have only seen a rise this large in seven out of the past 15 years.  In addition, both the expectations and current assessment components increased, which is extremely reassuring.  This number suggests that businesses are not worried about the impact of the value added tax increase next year and validates the European Central Bankââ,¬â"¢s continually hawkish stance and keeps them on track to raise interest rates again next year.  The rally in the Euro today has sent EUR/JPY to fresh all time highs and with fundamentals on its side, we could see a further rally in the EUR/USD.  Although there is no data scheduled for release, ECB President Trichet will be speaking to the EU Parliament Committee and as usual, he is a man to watch.  We expect Trichet to continue to favor higher rates, which should help keep EUR/USD bulls happy. 

British Pound
The British pound was the dayââ,¬â"¢s best performing currency pair.  Not only did the GBP rally over 220 pips against the US dollar, but it also hit a new 8 year high against the Japanese Yen.  Merger and acquisition news continues to fuel gains in the currency pair, with the latest being Swisscom Mobileââ,¬â"¢s GBP1.8 billion bid for a 25 percent stake in Vodafone.  This follows Japan Tobaccoââ,¬â"¢s GBP 7.5 billion purchase of Gallaher late last week, which adds up to close to GBP 10 billion.  With protectionism measures limiting acquisitions of US based companies, the UK has benefitted significantly with merger and acquisition flow being one of the primary drivers of sterling strength throughout 2006.  Looking ahead, the Bank of England will be releasing the minutes from their December 6 to 7 monetary policy meeting tomorrow morning.  The members are expected to have voted unanimously in favor of leaving interest rates unchanged at 5.0 percent earlier this month.  This would be a shift from the 7-2 vote for an interest rate hike last month.  What we will be looking for is the possibility of further inflation concerns by the BoE, which would resurrect talk of a rate hike by the central bank next year as well. 

Japanese Yen
The Japanese Yen weakened across the board today, sending EUR/JPY to a new all-time high and GBP/JPY to a fresh 8 year high.  As expected, the Bank of Japan left interest rates unchanged, but even though they did not change their overall assessment of the economy, they did talk about the weakness in consumption and consumer prices.  The bearish take on growth and inflation will delay the possibility of another rate hike by the Bank of Japan and at the same time, keep carry trades alive.  The Yen has also been impacted by the last minute change to Thailandââ,¬â"¢s currency controls.  As a proxy for Asian strength or weakness, Thailandââ,¬â"¢s new currency controls to prevent further currency appreciation has also led to weakness in the Japanese Yen. 

Commodity Currencies (CAD, AUD, NZD)
The Commodity Currencies were all stronger today despite some mixed economic data.  Canadian consumer prices came out softer, with only a 0.2 percent rise in the month of November, but core prices grew stronger than expected.  The trigger for the rally in the Canadian dollar was primarily the reversal in oil prices.  New Zealand reported a smaller than expected current account deficit and a higher than expected fourth quarter consumer confidence report.  This has allowed the market to shrug off Finance Minister Cullenââ,¬â"¢s repeated criticism of the currencyââ,¬â"¢s stubborn strength.  There was no data from Australia and the Australian calendar is completely empty for the rest of the week.

Kathy Lien is the Chief Currency Strategist at FXCM.