US Dollar
Weak economic data has pushed the US dollar lower but not by much as the market is still reeling off of this past Tuesdayââ,¬â"¢s strong inflation report.  As long as inflation remains high, the market believes that the Federal Reserve has little choice than to stick to their hawkish bias.  The biggest weakness today was in the Philadelphia Fed index and even within that report prices paid six months forward are expected to increase.  The sentiment of manufacturers in the Philadelphia region dropped to the weakest level since April 2003, but on an ISM adjusted basis, the index increased from 51.0 to 51.8 (adjusting for ISM means to use the same weighting scheme as the ISM index).  Overall, there is no argument that the manufacturing sector remains weak, but it may not be as weak as todayââ,¬â"¢s headline Philly Fed number indicates.  In fact, employment increased in both the current conditions and expectations component of the report.  The other disappointments this morning included a downward revision to third quarter GDP, a rise in jobless claims, softer personal consumption numbers and an unimpressive leading indicators report.  Tomorrow we are expecting durable goods orders, personal income and the PCE deflator.  With a sharp drop in orders in the month of October, a rebound is expected in November.  Personal income should remain unchanged, while the PCE deflator, which is a measure of inflation, is expected to tick upwards.  We continue to see no reason for the EUR/USD to break its recent 1.3050-1.3350 trading range. 

Euro and Swiss Franc
There was barely any Eurozone data released this morning aside from Italian consumer confidence, retail sales, trade balance and some state specific inflation reports.  All of the reports were stronger than expected except for Italian retail sales, but none of them were particularly market moving, which explains why there was minimal reaction in the EUR/USD today.  Profit taking remains the predominant theme in the currency pair and unfortunately, quiet trading may be just what we need to get use to the traditionally quiet Christmas ââ,¬â€œ New Years trading week where liquidity tends to dry up.  We do have one more day for potential volatility tomorrow with French PPI, consumer prices, business confidence, German CPI, Eurozone current account and industrial orders due for release.  Meanwhile over in Switzerland, the countryââ,¬â"¢s trade surplus dropped from CHF1.49 billion to CHF1.30 billion in the month of November.  This is the second straight month that the deficit has shrunk after hitting a record high in September. 

British Pound
A wider current account deficit has pushed the British pound lower for the second consecutive trading day as the prior strength of the British pound begins to hurt exports.  Weakness was limited however as GDP growth remains strong with the annualized pace of growth revised up from 2.7 percent to 2.9 percent in the third quarter.  For the most part, the UK seems to be one of the healthiest economies within the G7.  The combination of solid economic fundamentals and strong merger flow is keeping the currency supported.  This suggests that even though the GBP/USD looks to have set a short term top, we may not see much in the case of further losses.   There is one little caveat though ââ,¬â€œ a rumor circulated in the markets today about the risk of a terrorist attack in London over the holidays.  Hopefully that is not true, but it could lead to some more profit taking in the GBP/USD tomorrow.  Meanwhile there is no data on the calendar on Friday and all London markets are closed for trading on Monday for Boxing Day. 

Japanese Yen
The Japanese Yen strengthened across the board today thanks to a very strong trade surplus and a higher than expected all industry activity index.  The recent weakness of the Japanese Yen is sure to have played a role in contributing to stronger exports and overall improvement in economic activity.  We expect this to continue going forward with the trend turning to a greater number of positive rather than negative economic surprises.  The Yen also benefitted from comments by Japanââ,¬â"¢s Vice Finance Minister Fujii who when asked by a reporter, criticized the recent movements in EUR/JPY.  The markets are currently pricing in a rate hike by the Bank of Japan in January, but we think that for the time being, until we see more solid consumer spending and inflation data, the Bank of Japan will probably err on the side of looser monetary policy for a longer period of time. 

Commodity Currencies (CAD, AUD, NZD)
The Australian and Canadian dollars are weaker today while the New Zealand dollar strengthened.  With no economic data on tap except for new motor vehicle sales (which came out weaker), the Australian dollar is extending its losses after the governmentââ,¬â"¢s GDP downgrade earlier this week.  The Canadian dollar is being punished after a flat GDP reading for the month of October and a larger than expected drop in retail sales.  Canadian data is really beginning to soften and today, the loonie has no support from oil prices, which have also retraced.  New Zealand on the other hand shrugged off a weaker than expected GDP report as high yielding currencies remain in vogue after Icelandââ,¬â"¢s interest rate hike of 25bp, bringing rates to a record high of 14.25 percent.  New Zealand GDP rose by 0.3 percent in the third quarter compared to expectations for 0.5 percent growth.

Kathy Lien is the Chief Currency Strategist at FXCM.