US Dollar
The mixed price action in the US dollar today indicates that currency traders are simply marking time ahead of the ECB monetary policy meeting tomorrow and the G7 meeting this weekend. The lack of any important US economic numbers has kept most currency pairs within their January ranges. US productivity increased strongly in the fourth quarter, but any dollar bullishness was offset by the softer rise in unit labor costs. This should give comfort to the Federal Reserve since stronger labor costs would have triggered inflation concerns. Since the last FOMC meeting, there has been little new evidence to convince the Federal Reserve to take a stronger stance on rates. Even though they were slightly more optimistic about growth at the last monetary policy meeting, the take away message from their statement is that they needed to see more data before deciding what to do next with interest rates. Unfortunately with only tier 2 data such as wholesale sales, inventories and jobless claims left for the week, there is nothing that can shift the outlook for the US economy. Next week is a completely different story. Not only do we have Bernanke’s semi-annual testimony on the economy and monetary policy, but we also have the trade balance, retail sales, net foreign purchases of US securities, industrial production, Philly Fed and producer prices. In the meantime, the market will be keying off of tomorrow’s comments from the ECB.

Euro
The marquee event this week is tomorrow’s ECB monetary policy meeting. Although none of the economists surveyed by Bloomberg expect an interest rate hike, every one of them will be paying especially close attention to ECB President Trichet’s comments at the post meeting press-conference. The reason why his comments will be market moving is because the odds are 50 to 50 on whether Trichet’s comments will be more dovish or more hawkish. At the last monetary policy meeting, Trichet introduced a bit of doubt into the market about a February rate hike. Even though he said that interest rates remained low and monetary policy was very accommodative, he clearly pointed out that his statement no longer includes the words “strongly vigilant.” Market News International (MNI) has speculated that the next ECB rate hike in March could be their last. This could be possible since economic data is beginning to deteriorate as the increase in the value added tax begins to take a toll on the economy. The latest disappointment came from German industrial production, which dropped 0.5 percent in the month of December. Furthermore, the Europeans may want to take things into their own hands by engineering weakness in EUR/JPY if they do not get what they want at the G7. However there have also been rumors that the ECB was displeased with the MNI speculation and as such may want to put a hawkish spin into the comments to regain control of market expectations. Aside from the ECB rate decision, the German trade balance is also due for release; the surplus is expected to hold steady. After range trading for the past month, tomorrow’s ECB rate decision could drive the EUR/USD out of its 1.2860-1.3050 trading range. Meanwhile the seasonally adjusted Swiss unemployment rate dropped from 3.1 percent to 3.0 percent.

British Pound
The GBP/USD was the only major currency pair to lose value today. After a number of upside surprises in UK data, we finally have a downside surprise. UK industrial production dropped by 0.1 percent in the month of December with a downward revision the prior month. The Nationwide consumer confidence survey also increased less than expected for the month of January. The Bank of England has a monetary policy announcement scheduled for tomorrow. No follow-up moves are expected after the surprise rate hike last month which means that there will not be any comments from the BoE either.

Japanese Yen
The Japanese Yen continued to trade off of yesterday’s comments from US Treasury Paulson. The price action in the yen indicates that traders are no longer expecting any official comments about the yen at the G7 meeting. The Europeans will have to fight yen weakness alone and it doesn’t seem like they stand much of a chance. The latest comments from German and Japanese officials continue to indicate that sideline discussions will occur, but that will probably be it. The US is simply not worried about the current yen weakness especially since it has not affected USD/JPY by much and as Paulson noted, the US is in favor of free and openly competitive markets. However, there could still be some position squaring on Friday before the weekend event risk. If the meeting passes with no alterations to the statement, demand for carry trades will probably return to normal the following week.

Commodity Currencies (CAD, AUD, NZD)
The Australian and New Zealand dollars both strengthened ahead of their respective employment numbers tonight. New Zealand employment data actually disappointed despite the improvement in the unemployment rate. Employment dropped by 0.1 percent versus an expected increase of 0.8 percent. The reason why unemployment improved was because the participation rate was the lowest since 2005. Australian employment is due for release later this evening and another increase is expected after the 44.6k rise in January. Even though the Reserve Bank of Australia left interest rates unchanged last night, The Canadian dollar on the other hand is weaker against the US dollar on the back of an intraday reversal in oil prices. USD/CAD remains very much range bound and could push higher before making a major top. For our technical analysis on the trend reversal possibilities for USD/CAD, see our Special Report.

Kathy Lien is the Chief Currency Strategist at FXCM.