The Japanese currency has been losing ground against most of its liquid counterparts for the past two weeks, though this is likely more a manifestation of the thin liquidity conditions during this that period rather than any true turn in risk appetite.  With the markets expected to once again hit full capacity this week, this theory will be pivotal in defining the strength of the yen and the outlook for general risk trends.

The British pound continued its move towards parity against the euro and slid lower against the U.S. dollar ahead of the New Year, which suggests that investors remain bearish against the currency as market participants widely expect the Bank of England to lower borrowing costs even further in January.

Switzerland’s economic calendar is empty next week, leaving the franc in search of other catalysts to guide directional momentum. On balance, the medium-term outlook favors Swiss franc weakness.

The British pound climbed against the US dollar throughout last week, but the currency's status versus the euro is a bit more indicative of the fundamental outlook for the UK economy.

The Swiss franc strengthened this week to pick up 200+ points against the U.S. dollar amid the dismal GDP release however, investors are likely to turn over their positions next week as the Swiss National Bank is widely expected to lower the 3-month target LIBOR rate by 50bp to 0.50%.

The President of the ECB said inflation pressures are diminishing due to a fall in commodity prices and a significant slowdown in economic activity.

Currency traders may see the Japanese yen lose ground as seasonal forces take hold of the financial markets on approach to the end of the calendar year.

The Swiss National Bank surprised markets with a 100 bps reduction in its benchmark interest rate as the economic growth outlook for the country worsened.  The export driven economy saw demand for its goods fall 4.6% in September and with the credit crisis reaching heightened levels in October global demand is expected to fall further.

Consumer prices fell 1.0% in October, which was the biggest decline on record, dragging the annualized inflation rate to 3.7% from 4.9% -- the lowest since last October.

Forex market volatility has remained high, but many of the major currency pairs have simply range-traded between key support and resistance levels.  Event risk for the US dollar, British pound, and Canadian dollar will pick up quite a bit this week, providing potential for breakouts across the majors.