US Dollar
With no US data on tap, the dollar did not have enough momentum to extend its strength against the Euro and British pound. Federal Reserve President Bernanke spoke primarily about income inequality today and did not make any comments on monetary policy. Instead US Treasury Secretary Paulson’s was the one who moved markets. This is an interesting departure from the time when Alan Greenspan’s words would trigger currency movements while John Snow’s comments didn’t. Paulson was open and direct this morning when he said that the yen is traded in an open and competitive market place and even though some do not like where the Yen is trading, it is the US’ job to fight for free competitive markets. This is a clear indication that the US will not support official criticism of yen weakness. The Japanese Yen has sold off against nearly all of the high yielders except for the US dollar where we continue to see profit taking. For more on how the G7 meeting could impact the Yen, check out our Special Report. Meanwhile the EUR/USD continues to range trade and we do not expect any breakout movements before the ECB monetary policy meeting on Thursday. US productivity, unit labor costs and consumer credit could provide for some mild dollar driven market activity tomorrow. Productivity and labor costs are expected to increase strongly while consumer credit is expected to contract.

Euro
Weaker economic data has not stopped the Euro from rising. Despite solid German retail sales numbers last month, the increase in Eurozone retail sales fell short of expectations. German factory orders also dropped 0.2 percent against the market’s 0.5 percent. Data has been turning sour and tomorrow’s German industrial production report should be no different. However traders have been hesistant to take the Euro beyond its 1.2865-1.3065 trading range until they have the greenlight from the European Central Bank. The Euro sold off on Thursday and Friday on speculation that the next ECB rate hike will be their last. However today the currency has gained strength as a Bloomberg poll reveals that economists are expecting 2 more rate hikes. If the Europeans do not get what they want at the G7 meeting, they may have to take matters into their own hands. The weak yen against the Euro has taken a big toll on the export sector. If the central bank signaled the intention to pause, they may achieve a part of the correction that they are looking for in EUR/JPY. Meanwhile the Swiss Franc is also stronger across the board after Swiss National Bank member Hildebrand suggested that “more interest rate hikes are needed.” Swiss unemployment is also due for release tomorrow. The unemployment rate is expected to remain unchanged at 3.3 percent.

British Pound
Stronger UK retail sales has helped to boost the British pound against the US dollar, Euro and Japanese Yen. Recent UK data has brought back speculation of another rate hike by the Bank of England but we continue to believe that the central bank will leave rates unchanged on Thursday. A rate hike later in the spring however is not out of the question but do not except any affirmation from the BoE since they do not publish any statements when rates are left unchanged. Industrial production and manufacturing production are due for release tomorrow and the recent rise in the manufacturing PMI report suggests that we could see some strength in those reports as well. Merger and acquisition flow is also helping to drive activity. Deutsche Telekom has been rumored to be in talks to buy UK based Cable and Wireless.

Japanese Yen
The Japanese Yen is weaker against all of the majors except for the US dollar and Japanese Yen. The G7 meeting continues to be the market’s main focus. Paulson’s comments suggests that the discussions about Yen weakness may be limited to the lunch breaks or cocktail parties afterwards. Both the Japanese and the Europeans have indicated that some discussions are expected and the question is whether these comments will make it to the newswires. Japanese officials continue to be concerned about the sustainability of the economic recovery. Japanese Economics Minister Ota said that they need to continue to watch consumer spending since the recovery has been patchy at best. There is no data on the calendar tonight, leading indicators reported last night were right in line with expectations.

Commodity Currencies (CAD, AUD, NZD)
Activity picked up in the commodity bloc Wednesday with an unsually lively economic calendar for Australia. The anchor of the day’s news was the RBA’s policy meeting. Though the decision to leave the overnight cash rate at 6.25 percent was widely expected, the actual print will help to shake out those Aussie dollar bulls that were holding on to the hope of a surprise hike. More grounded indicators were also issued from Australia. Partially influenced by the previous rate boost in November, the AiG’s Performance of Construction Index slipped back below the pivotal 50.0 boom/bust level with its 48.4 print. Alternatively, the drop in housing may be offset by strength in the consumer spending. Leading the government’s sales number, the CashCard Retail Index for January jumped 0.9 percent. Elsewhere, the Canadian dollar was weighing the health of its own housing sector. Building permits dropped 7.8 percent, the most in eight months, to put a damper on expectations on the Housing Starts and New Housing Price Index indicators due Thursday.

Kathy Lien is the Chief Currency Strategist at FXCM.