With London closed for its last bank holiday until Christmas and a barren economic calendar in both Asia and Europe, the currency markets opened the week bouncing back and forth in directionless trade. Carry traders got a boost during the Asian open with high yielders seeing some follow through after a strong equity close on Friday in New York. However, by early European session most of the gains evaporated party on profit taking in very thin trading conditions and partly on the fresh news of sub-prime woes as Barclays Bank had been dragged deeper into the crisis after Landesbank Sachsen, a major client, had to be rescued by a rival state-owned bank in Germany.

The after shocks from fallout continue to impact currency trade as the market tries to ascertain the total extent of the damage but focus this week will likely shift to the Central Bank speak. As September approaches, traders face two key questions with respect to monetary policy. Will ECB maintain its commitment to raise rates by 25bp to 4.25% in the face of growing credit problems in the German banking system? And further, will the Fed buckle to the pressure of the markets and lower rates by 25bp to 5.00%? With respect to the ECB the currency markets may get some guidance later on today when President Trichet speaks in Budapest at 13:00 GMT, although we suspect that the ECB chief will continue leave his option open by refusing to pre-commit to any course of action.

The fact that so much of the US sub-prime risk wound up on the books of German banks must be a concern to European monetary authorities who pumped massive amounts of liquidity into the banking system over the past two weeks. They would no doubt prefer to hold off on further tightening until some semblance of calm has been restored in global capital markets. However, as we noted before the ECB is highly concerned with projecting an image of transparency and consistency to the markets and a delay in policy after the central bank had already sent clear signs of a hike may undermine their credibility.

In the US today the markets will get a look at the Existing Home Sales data with consensus call forecasting a small contraction from the month prior. The data is for July and therefore may be a dated in its value as the recent market turmoil has made credit far more difficult and costly to obtain which will likely have a much more depressive effect on home sales as we move into the fall season. The median house price data is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950 indicating the sharpness of the decline.

Overall trade today is likely to remain relatively quiet. Indeed given the fact that this is the last week of August as we head in the Labor holiday weekend, perhaps the markets will get a much needed rest from volatility as news flow slows to a small trickle.

Boris Schlossberg is a Senior Currency Strategist at FXCM.