US Dollar
US retail sales were very strong in the month of December, but after a week of solid gains it seems that there just werenââ,¬â"¢t enough buyers out there to take the currency even higher.  Across the board, it appears that the dollarââ,¬â"¢s rally has become exhaustive as the EUR/USD hits a critical support level while USD/JPY reaches resistance.  This morning's retail sales report should have convinced any remaining dollar bulls sitting on the sidelines to join the party. Consumer spending was stronger across the board with both headline retail sales rising 0.9 percent and ex autos rising by 1.0 percent. Recent data indicates that many economy watchers have underestimated the strength of the US economy.  Last weekââ,¬â"¢s jump in non-farm payrolls and this weekââ,¬â"¢s improvement in the trade balance along with the rise in retail sales will be enough to cause widespread revisions to fourth quarter GDP forecasts.  It will also keep the Federal Reserve on hold for the foreseeable future.  They have no reason to shift gears and the market expects the same as future contracts continue to price in a less than 50 percent chance of a rate hike in the first half of the year.  In addition to the rise in retail sales, import prices also jumped 1.1 percent due to the beginning of the month increase in crude prices.  Inflation is on the Fedââ,¬â"¢s radar and this number only confirms the recent hawkishness by Fed officials.  Next week, inflation will continue to be a primary theme in the markets with producer and consumer prices due for release.  The Treasury will also be releasing their report on net foreign purchases of US securities.  Given the improvement in the trade deficit, foreign inflows should have no problem covering the same monthââ,¬â"¢s trade related outflows.  Volatility should continue in the currency market, but with the US closed on Monday for Martin Luther King Jr. day, that vitality may not come until Wednesday when PPI is due for release.

Euro
It seems like gravity has come back to haunt the EUR/USD as the currency pair gives back all of its November gains.  The near vertical climb in the EUR/USD has now been met with a near vertical slide.  The combination of stronger US data and a more conservative European Central Bank has given EUR/USD bulls good reason to bail out of their long trades.  The highlight of this past week was the doubt that ECB President Trichet introduced into the markets about their plans to continue raising interest rates.  Originally the market was expecting the central bank to raise interest rates in February, but now after his less hawkish comments on Thursday, that prediction has been pushed out to March.  It also seems that this is the new message other ECB officials have been mandated to send to the markets as well.  In order to avoid confusion, European central bank officials usually send one harmonious message to the markets when they give speeches which may explain why this morning Quaden said that low interest rates are good for the Eurozone growth.  Garganas added later on that the ECB has done a good job of anchoring inflation.  This is a shift away from their prior comments about inflation risks remaining high and their calls for more aggressive measures by the central bank.  In the week ahead, like the US, there is a great deal of consumer price reports due for release.  The other notable number that we are expecting is the ZEW survey of analyst sentiment. 

British Pound
The surprise interest rate hike by the Bank of England this week has sent the British pound soaring against the Euro, US dollar and Japanese Yen.  Although everyone was expecting a rate hike from the central bank eventually, the timing of the hike was a complete surprise.  With the producer price report due this Monday and the consumer price report due on Tuesday, the main question is whether the Bank of England knew something that we didnââ,¬â"¢t.  By now, it is quite certain that either the PPI or CPI or both releases will come in much stronger than expected next week with the annualized CPI rate probably accelerating even further beyond the BoEââ,¬â"¢s 2.0 percent comfort level.  Annualized CPI growth in November already reached 2.7 percent, which was an 11 year high.  Overall the economy is doing very well and we expect that strength to be reflected in next weekââ,¬â"¢s unemployment, retail sales and money supply data.  If growth continues at its current pace, the BoE may have to follow up with another rate hike.  For the time being though, the latest hike is more likely an acceleration of the March hike rather than the need to deliver two back to back rate hikes. 

Japanese Yen
The Japanese Yen will be a big focus next week as the market gears up for a possible interest hike from the Bank of Japan.  Traders are very insecure at the moment as the futures market prices in a 65 percent chance of a rate hike which is basically 50-50.  The decision is scheduled for January 18th and thus far, we have seen little clarity from the Bank of Japan or the Japanese government.  The problem with Japan has long been the battle between the monetary officials who want to tighten policy and the politicians who want to keep the economy stimulative.  The recent weakness in Yen may actually be perfect timing in this case since the currencyââ,¬â"¢s movements may already be stimulative enough for the economy that the Japanese government feels comfortable allowing the BoJ to deliver a rate hike.  However even if they raise rates, this may not be completely positive for the Yen.  Judging from the BoJââ,¬â"¢s track record, in all likelihood, they will raise rates, then pause for a good number of months which would leave carry trades in play. 

Commodity Currencies (CAD, AUD, NZD)
It has been a pretty good day for the commodity currencies despite the lack of any meaningful data. New Zealand was the only country with an economic release and that was building permits, which came out weaker than expected.  Overall, the recovery in gold and oil prices was the main theme, which has helped to send the Australian and Canadian dollars higher.  In the week ahead, the calendar is far busier.   Both Australia and New Zealand have inflation reports due for release.  New Zealand also has a retail sales report while Canadaââ,¬â"¢s central bank will be meeting to decide on interest rates.  No changes are expected which will leave their monetary policy report as the main focus in Canada next week. 

Kathy Lien is the Chief Currency Strategist at FXCM.