US Dollar
Over the past year, the US non-farm payrolls report has become incredibly difficult to trade. Large revisions are made frequently which is reducing the accuracy and reliability of each individual report. This is exactly what happened this morning when traders first took the US dollar lower on the disappointing headline release but quickly erased those losses when they saw the massive revisions for the prior months. More specifically even though payrolls increased by only 111k in December compared to the market’s 150k forecast, the number of additional jobs added back to the November and December payrolls totaled 81k, washing out the 39k shortfall. The massive revision was for the year ending in March 2006 where we actually saw payrolls increase by 754k, the largest revision on record. The report was not dollar bearish but at the same time it was not completely dollar bullish. Despite the overall health of the labor market, the increase in the unemployment rate and the tepid 0.2 percent rise in wage growth is another reason why the Federal Reserve has chosen to hold back any interest rate hikes. We need to see at least 2 more months of solid data before the Federal Reserve will actually consider tightening monetary policy. The NFP report has driven the EUR/USD right back into its month long 1.2865 to 1.3065 trading range. In the week ahead, the economic calendar is very light which could keep the currency pair range bound. The only notable release is service sector ISM on Monday. Traders should keep an eye on oil prices which have risen back to $59 a barrel. With little data on tap, the impact of higher oil prices could become a major talking point in the markets once again. The G7 meeting the following weekend will also receive center focus.

Euro
With nothing except Eurozone producer prices on the calendar, the Euro traded solely off of US data. Producer price growth was flat in the month of December, which was right in line with expectations. The European Central Bank has a monetary policy meeting next week. Prior to Trichet’s post meeting comments in January, the market had expected the next interest rate hike to come in February. Now rate hike expectations have been pushed out to March. The recently hawkish comments from ECB officials leaves two possibilities open. The first is a hike in February followed by neutral comments, which would only be mildly surprising or a rate hike in March. Market News International has quoted a “well informed source” as telling them that the ECB will raise rates in March and could pause for several months after the rate hike. With the end near in either scenario, traders have taken this to be another reason to send the Euro lower. In the week ahead, service sector PMI data along with Eurozone retail sales, the German trade balance and factory orders are due for release. Although the calendar is slightly busier than the US calendar, there is nothing exceptionally market moving. Switzerland on the other hand has very important data due for release including the unemployment report, consumer prices and the SECO consumer climate index.

British Pound
Another dose of solid economic data has sent the British pound higher against both the US dollar and Euro. Construction sector PMI increased from 57.5 to 57.9, which is the second straight increase and suggests that the housing market may not be as bad as the recent housing price data may indicate. Service sector ISM is due on Monday and if that is stronger as well, we would have stronger activity in all three sectors of the economy (manufacturing, construction and service), paving the way for another interest rate hike from the Bank of England. After the surprise interest rate hike in January, there is little chance that the BoE will raise rates again this upcoming Thursday. They have been signaling to the market that the January hike was an acceleration of what the market originally expected in February. Economic conditions have not improved so much that another rate hike is warranted. However, we do want to point out that there is a small group calling for a rate hike next week including the UK think-tank NIESR according to the Financial Times. Aside from service sector ISM and the BoE rate decision, we are also expecting BRC retail sales, industrial production and the trade balance. All of these are fairly important releases which suggest that the British pound could be a fairly active trading pair in the week ahead.

Japanese Yen
The price activity of the Japanese Yen continues to be very mixed as the market speculates on the potential outcome of next weekend’s G7 meeting. After US Treasury Secretary Paulson’s comments yesterday, the US appeared unconcerned about the recent weakness in the Japanese Yen. However today they officially filed an unfair trade case against Beijing to the World Trade Organization. The US is claiming that China’s subsidies are illegal and they have put a big dent into the sale of US products in China. This is a big step away from the buddy versus bully approach that Paulson had advocated and signals that the US remains a protectionist. It will be interesting to see if there are any retaliatory measures by China before the G7. If there is, the US may be tempted to back the Eurozone in calling for more normalization in the currency policies in the entire region. There is little data on the Japanese economic calendar next week which will keep the G7 meeting the center focus.

Commodity Currencies (CAD, AUD, NZD)
Softer Australian and New Zealand data has limited gains in the Aussie and Kiwi. The Australian trade deficit increased more than expected as the strong currency took a larger toll on exports while domestic demand for foreign imports was even more robust than analysts had expected. In New Zealand, visitor arrivals dropped 1.3 percent. Gold prices are also lower which is contributing to the tepid activity in those currencies. The Canadian dollar sold off significantly despite the rise in oil prices and we expect this relationship to be corrected in the week ahead. Even though the US calendar is light, there are a ton of data from Australia, New Zealand and Canada next week. This includes employment reports from all three countries, the CAD IVEY PMI report, the RBA rate decision and Australian retail sales.

Kathy Lien is the Chief Currency Strategist at FXCM.