The health of the financial markets will determine the pound’s future – not just in the days ahead, but for weeks and months.

The U.S. dollar was relatively strong through Thursday on speculation the U.S. Congress will approve a $700bn plan that will enable banks to clean up their balance sheets from leveraged investments in mortgage backed securities.

The U.S. dollar has been selling off on speculation that a government sponsored plan to buy illiquid mortgage assets from financial institutions will aggravate the budget deficit and make the U.S. tax payer more vulnerable to a slowdown in the U.S.

The UK calendar is noticeably bare next week, with Pound price action taking its cues from US dollar sentiment.  Rightmove House Prices will likely continue to see declines in September as the housing shows now signs of letting up.

The U.S. Federal Reserve left the Fed Funds rate unchanged at 2 percent. However, the FOMC statement released after the rate decision was less dovish than expected and the U.S. dollar rallied against the world’s most heavily traded currencies.

Will the Fed reduce rates, and more importantly, how will the meeting impact the US dollar this week?

The Swiss franc has had a mixed reaction to its major counterparts this past week.

The sharp moves in the euro versus the US dollar have been the result of expectations that, in the near-term, the Fed will hike rates and the ECB will cut.  However, there are indications that these shifts in interest rates won't even occur until 2009.

The US dollar faces substantial event risk, but this week is a bit different from others as the release of economic indicators may prove to be rather unimportant. Instead, the greatest threat to the US dollar is the fate of Fannie Mae and Freddie Mac.

The ECB is widely expected to keep rates on hold at 4.25%. Yet, in the near future the ECB could come under pressure from several EU politicians to review its monetary policy and lower interest rate differentials may accelerate the losses in the EUR/USD.