Greenback on Shaky Ground
The combination of a record high US current account deficit along with further signs of a weakening housing market triggered a dollar sell off early in the week with EUR/USD peaking at 1.3247. The current account balance ballooned to -$225.6 billion in Q3, which was slightly worse than the market expected and represents 6.7% of GDP.  However after the previous weekâ�,��"�s surprise drop in the trade deficit and rise in net foreign purchases of US securities, the significance of the current account deficitâ�,��"�s widening is eroded. Meanwhile, both the NAHB housing market index and building permits hit the tape at disappointing levels, negating some of the optimism that the fallout of the housing market had hit a bottom. Furthermore, the final reading of Q3 GDP was revised lower to 2.0%, while personal spending and the Philly Fed survey both missed expectations, pointing to substantial weakening in multiple sectors of the economy.

However, greenback longs stuck around the markets, remaining bullish on the surprise jump on Tuesday in the producer price index of 2.0% for the month along with a 1.3% monthly gain in core prices.  On both a headline and a core level, prices grew by multi-decade highs, which raised the concern of whether consumer prices may follow suit next month.  A better than expected reading in the University of Michigan consumer confident report at the end of the week sent EUR/USD bears in action, as the dollar was able to make back most its losses by the close of the New York session on Friday.

With many markets on holiday this week and US economic data decidedly mixed, the greenback will likely remain at a standstill. On Tuesday, traders will be looking towards the Richmond Fed reading for confirmation of the most recent disappointing Philly Fed report. Another paltry reading will keep expectations for Chicago PMI on Thursday at a relatively low level. Additionally, with housing data and consumer confidence anticipated to fall, the US dollar will have little ground to stand on when traders flood back into the markets after the New Year and allows major upside potential for the EUR/USD pair after the holidays.

Euro Remains Bid on Strong Sentiment
Although inflation data was generally unsupportive for the euro, a surge in the German IFO survey kept the EUR/USD and EUR/JPY pairs bid for much of the week. The euro managed to hit a high of 1.3247 against the greenback for the week, though price softened later on, while the EUR/JPY cross jumped to a record of 1.5645 as European growth outpaces that of Japan by leaps and bounds. In European news, despite a strong currency and a recent interest rate hike, German business confidence skyrocketed from 106.8 to 108.7, which was the indexâ�,��"�s highest reading since the first ever business confidence print in January 1991.  As we mentioned last week, â�,��"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 Bankâ�,��"�s continually hawkish stance and keeps them on track to raise interest rates again next year.â�,�

With much of Europe (and the rest of the world) on vacation this week, it is likely the euro will simply meander lower against both the dollar and the yen. Profit taking will probably remain the predominant theme in the EUR/USD pair amidst the traditionally quiet Christmas/New Yearâ�,��"�s trading week where liquidity tends to dry up. The sole releases for the week, GfK consumer confidence and M3 money supply, are both anticipated to gain and continue to back the European Central Bankâ�,��"�s hawkish stance. However, tradersâ�,��"� true sentiment on the releases will likely not be apparent until the New Year.

Yen Loses 118.50
After struggling to hold below resistance at 118.50, Yen ended last week off on a sour note as USD/JPY jumped as high as 118.97 when it became crystal clear that the Bank of Japan has absolutely no intention of hiking rates before seeing solid signs of inflation and consumption growth. The BOJ Monetary Policy committee completed its December meeting by maintaining a steady hand and leaving the headline assessment of current conditions unchanged, saying â�,��"Japan's economy is expanding moderately.â�,� The central bank did not change the  assessment of the economic outlook either, noting that â�,��"Japan's economy is expected to continue expanding moderately.â�,� Governor Fukui conceded in a post meeting press conference that Japanese consumption remained weak, which in turn prevented him from making any prognostications regarding the timing of any future rate hikes. Meanwhile, the all-industry activity index rose slightly more than anticipated to 1.7%, which was inline with the previous weekâ�,��"�s strong tertiary index reading. The data only reiterates the strength of manufacturers and businesses in general. However, until these companies start to raise payrolls for employees, consumer spending has little help of picking up.

Japan has by far the greatest amount of data on the agenda for this week, but given the low amount of volatility expected, the economic releases may not resonate much through the markets. Whether this is good or bad for the yen remains to be seen, as weak CPI released earlier today along with less optimistic business sentiment certainly does not bode well for the national currency. However, should we see a rise in retail trade and labor cash earnings, the negative effects of tepid CPI may be negated, as USD/JPY bears will bet that signs of improving consumption will lead to a more hawkish BOJ.

Will a Turn in Housing Equal a Turn in Cable?
The British pound held its own against the greenback last week as a spate of solid economic releases boosted the prospects of a 2007 hike by the Bank of England. First, house prices continued to hold near a record as the RICS index only slipped to 47% from 48% as mortgage lending rose 6.5 billion pounds for the month of November. With the UK housing sector remaining resilient, broader price pressures in the economy along with rampant borrowing could continue to accelerate. Meanwhile, the final reading of Q3 GDP was posted at 2.9% from 2.7% on upward revisions to Q1 and Q2 growth, while CBI distributive trades showed booming retail sales in November. However, the CBI outlook for December declined to a reading of 4 from 9, indicating a lack of confidence in holiday spending results. On the flip side, M4 money supply declined to 13.1%, down from the record of 14.5% just a few months ago. Nevertheless, M4 money supply is well above average, and combined with housing reports and potential wage price inflation, the Bank of England will be on edge in coming months.

With the UK on holiday for the first part of the week, trading is likely to be very light, especially given the sparse economic calendar. The Nationwide measure of house price growth is anticipated to slip to 0.8% for the month of December â�,�“ possibly one of the first indications that the Bank of Englandâ�,��"�s two rate hikes in 2006 are finally starting to impact the sector. Should traders find that demand for housing has peaked, Cable could be in for a mighty turn from its record highs.

Swissie Under Pressure
While the Swiss franc ended the week a nudge higher against the dollar, economic data out of Switzerland indicated that there may be little upside potential for the national currency. First, industrial output during the third quarter fell 0.5% in the third quarter against expectations of a more hefty 2.6% decline, while the annual rate surged to 8.2%. A summary of the industrial production report showed that new orders jumped 10.1% while sales gained a solid 9.1%. The data indicates that export and domestic demand underpinned the industrial sector in the third quarter. Meanwhile, the Swiss trade surplus narrowed for the second month in a row to 1.30 billion Swiss francs as imports edged 0.3% higher from October while exports declined 2.9%. Nevertheless, demand from the Euro-zone remains relatively strong and should help support the surplus in coming months. Overall, though economic data wasnâ�,��"�t overwhelmingly negative, the reports back the Swiss National Bankâ�,��"�s predictions of slowing growth, which likely peaked just a few months ago.

Economic data will do little to help the Swiss franc next week as the most important indicator out of Switzerland, the KOF leading indicator, is anticipated to slip for the sixth consecutive month in a row to 1.60 in December from 1.73. A drop in KOF would only reiterate the idea that Swiss growth peaked months ago, putting Swissie in precarious position. However, should exports continue to remain buoyant and help prop the economy, Swissie could be saved from making precipitous declines.

Boris Schlossberg is a Senior Currency Strategist at FXCM.