US Dollar
The foreign exchange market continued to be pro-dollars as it sent the greenback higher against every major currency except for the Japanese Yen. With nothing meaningful to latch onto, the Yen staged another impressive rally while the Australian dollar and British pound continued to sell-off. Carry trade liquidation is still in the works but looking ahead, the move may be getting a bit tired. Even though jobless claims and existing home sales both surprised to the downside, these minor indicators failed to leave a dent in the dollar as the trend remains strong for both reports. Jobless claims increased by 325k after remaining below 300k for the past two weeks while existing home sales dropped for the first time in three months. These disappointments still represent adjustments rather than negative implications for the US economy. Non-farm payrolls are due next week and today’s rise in the help wanted index suggests that job growth could remain strong. Tomorrow we have the most important piece of US data this week, which are durable goods orders for the month of December. Demand is expected to have been strong thanks to a big increase in aircraft and machinery orders. Unlike existing home sales, new home sales are projected to rise in the month of December which would confirm that the housing market remains stable. Although durable goods are important, any surprise may still not be significant enough to take the EUR/USD out of its 200 point trading range. However the chance of a breakout next week is very strong as the economic calendar heats up.

Euro
The Euro has tumbled against the US dollar on the back of disappointing economic data. The potential impact of the 3 percent increase in Germany’s value added tax has been a major concern for all market watchers. When the German business confidence index hit a 16 year high last month, that concern was alleviated significantly. However the latest pullback in both business and consumer confidence raises the question of whether the economy is no longer immune to the tax increase. Originally expected to rise, the January IFO index dropped from 108.7 to 107.9 while the Gfk consumer confidence index slipped from 8.7 to 4.8. In the grand scheme of things, business confidence still remains at healthy levels and for the time being will not deter the European Central bank from lifting interest rates in the first quarter.

British Pound
The British pound extended its losses against both the Euro and US dollar despite the lack of any meaningful economic data. The market is still reeling off of the surprise voting record at the most recent monetary policy meeting. Looking ahead, the British pound’s weakness against the US dollar is nearing support. Whether this level will hold may be determined by the housing data due out tomorrow. With BoE policy still in focus, further signs of weakness in the housing market could be cause for concern. Mortgage approvals are expected to drop by a whopping 12.6 percent in the month of December. If this large drop is confirmed, we could see further weakness in the British pound.

Japanese Yen
Despite an intraday reversal, carry trade liquidation continued to be the predominant theme in the markets today. The see saw price action in the currency was a direct result of official comments which is frequently a driver of the Yen. The initial rally last night was driven by the hawkish comments from Bank of Japan member Suda who said that she was worried about interest rates remaining too low for too long. She felt that the central bank should not hesitate to raise interest rates which are a clear indication of how she may have voted at the last monetary policy meeting. The reversal in the European session was triggered by comments from Germany’s deputy economy minister who said that the yen weakness will not be a major feature at the G7 meeting next month. Tonight we will have a chance to see the price react to actual economic data. Consumer prices are due for release which is always one of the most important pieces of data that the central bank watches. Given their decision to leave rates on hold, consumer price growth is expected to be tame.

Commodity Currencies (CAD, AUD, NZD)
The Australian, New Zealand and Canadian dollars are all weaker across the board as the liquidation of high yielding currencies continues. Commodity prices are also softer which is contributing to the selling pressure in these currencies. Although there was no economic data released from any of these countries, the surprise drop in Australian consumer prices continues to drive market activity. With no economic data due out tomorrow either, retracements may be in order. Bank of Canada Governor Dodge spoke in Toronto today where he reiterated the central bank’s balanced outlook and his forecasts for slower consumer price growth. New Zealand seems to be the only country that has the possibility of seeing higher interest rates this year which suggests that the currency could outperform its commodity bloc peers. Many banks have already revised higher their forecasts for New Zealand interest rates this year.

Kathy Lien is the Chief Currency Strategist at FXCM.