US Dollar
The market is getting tired of selling US dollars and has instead opted to take profit on dollar shorts ahead of the three day weekend in the US. Economic data continued to disappoint, but the disappointments were still not significant enough to stop the Federal Reserve from raising interest rates. This morning, producer prices fell 0.6 percent in the month of January, housing starts dropped 14.3 percent while consumer confidence slipped to 93.3. The disappointments proved to be anti-climatic since these are second tier reports. Even though PPI is fairly important, the drop was in line with expectations and prices excluding food and energy increased by 0.2 percent. As if to assure the market that the Federal Reserve is not worried about the drop in PPI, Chicago Fed President Moskow came on the wires after the release and said that the Fed still needs to clamp down on inflation and will continue to look to raise interest rates. He was optimistic about growth, downplayed the weakness in the housing market and warned that inflation risks remain to the upside. Unfortunately the week ahead will yield little clarity. The only important of piece of economic data on the calendar is consumer prices. Weakness is expected and will not be a surprise. Inflation is dropping around the world, but all of the central banks believe that this drop should only be temporary given the resurgence in energy prices this month. Furthermore, housing is the Fed’s number one focus and we will not get more housing related data until the following week. This means that the dollar could consolidate in the week ahead, especially against the Euro given its lack of meaningful data other than the German IFO report.

Euro
After consolidating within a 200 point trading range for over a month, the EUR/USD has finally broken out this past week. An upside breakout was triggered by a barrage of disappointing US economic data in the face of a consistently hawkish Central Bank in Europe. Eurozone economic data continues to outperform with the trade surplus increasing from 2.0 billion to 2.5 billion in the month of December. French non-farm payrolls increased by 0.2 percent in the fourth quarter, which was right in line with expectations. The hawkishness continues to be reflected in the comments from European officials. ECB Wellink said that the economy is running at full steam while Gonzalez-Paramo said that the ECB cannot be calm on inflation risks. In the week ahead, there are number of second tier Eurozone data such as French GDP, consumer prices, Eurozone current account and industrial orders. The most important release is the German IFO report on Friday. Business sentiment is expected to hold steady but we believe that the risks are skewed to the downside since January’s optimism may have stemmed from the aggressive consumer spending that we saw in the month of December. Looking ahead, the risks that the Value Added tax may begin to hurt the economy are increasing and business confidence could reflect that outlook. Meanwhile Switzerland reported a very strong 9.2 percent increase in retail sales today, but the market shrugged the number off ahead of the US data. In the week ahead, the only piece of Swiss data due for release is the trade balance but SNB President Roth is also scheduled to speak.

British Pound
It has been a tough week for the British pound as weak economic data caused the currency to under perform against both the Euro and US dollar. There was no UK data released today but the EU Commission raised their GDP forecast for the UK from 2.6 percent to 2.7 percent this year. At this point, there is only a slim chance for a rate hike in March. However, with the UK, things change frequently and next week’s busy economic calendar could easily shift the market’s outlook. The Bank of England will be releasing the minutes from their monetary policy meeting earlier this month. The most important takeaway from the report will be how the members voted. If the decision to leave rates unchanged was unanimous, then the odds for a rate hike in March will be very low. If at least 2 members voted in favor of a rate hike, then market expectations will quickly adjust to reflect the possibility of 5.50 percent rates in March.

Japanese Yen
The best performing currency pair of the week was the Japanese Yen. The combination of a strong GDP report and liquidation of yen shorts have sent the Yen soaring against all of the majors on the prospect that the Bank of Japan could raise interest rates next week. Aside from the GDP report, most other data has not surprised to the upside. The latest was the December tertiary activity index, which dropped by 0.4 percent. As a result, we still think that there is only a 50-50 chance of a rate hike next week and overnight index swaps and a recent Reuters poll reflects that. The Bank of Japan would raise rates for only one reason and that would be if there was a behind the scenes agreement between the Europeans and the Japanese at last weekend’s G7 meeting that effectively allowed Japan to engineer strength in their own currency rather than be outwardly pressured to do. Growth is improving, but there are still no signs of inflation. Either way expect the Japanese Yen to be a big market mover next week.

Commodity Currencies (CAD, AUD, NZD)
The Australian, New Zealand and Canadian dollars extended their strength today as commodity prices continued to climb. Oil prices are back above $59 a barrel and that is keeping the Canadian dollar at a seven week high against the US dollar. We are finally seeing the benefits of the prior weakness in the Canadian dollar. In the week ahead, we are expecting wholesale trade and inventories, Canadian CPI which is expected to be softer, just like the inflation reports from the other parts of the world, retail sales, which is expected to be stronger and leading indicators. Bank of Canada Governor Kennedy is also scheduled to speak on economic change. Australia and New Zealand have a fairly light calendar. RBA Governor Stevens will be speaking before the House Economic Committee. His comments will be extremely important given the rather cautious comments on the outlook for the economy that we heard from the Treasury’s Costello earlier this week. The only piece of data due for release is the wage cost index. From New Zealand, the only releases are tax receipts and credit card spending.

Kathy Lien is the Chief Currency Strategist at FXCM.