USD - After last week's USD weakness - it slipped from 1.3387 to 1.3621 against the EUR - we are anticipating a more neutral week and a period of consolidation. This week could prove to be key in terms of setting the tone for US markets, with the FOMC holding its first policy meeting of the year on Wednesday, and advance Q4 GDP data due for release on Friday. No major changes to the Fed's stance are expected, despite the fact that the annual rotation of voting members has meant a shift in a more hawkish direction. The new voters in the FOMC remain skeptical about the benefits of the Fed's asset purchase program, but they have signaled that they aim to stick with Chairman Bernanke's plan to buy USD600bn in treasury securities. Improvement in the labor market has continued, albeit at a gradual pace, and despite GDP growth running close to 4% q/q AR in Q4 last year, it will take time for the unemployment rate to normalize in a non-inflationary environment. Besides the FOMC meeting, we will get the first estimate of Q4 GDP growth will be released later in the week, expected at 3.5% q/q AR driven by strong growth in personal spending. On Thursday we will get an update on the housing market, with both house price data and home sales, followed by consumer confidence data, a new round of regional PMIs and information on business capex from the durable goods orders report.

EUR - The euro climbed to 2-ms highs following signs the Eurozone economy continues to expand. The single currency rose to highs at $1.3686 today after strong services and manufacturing Purchasing Manager's (PMI) reports. The Eurozone Services PMI rose to 55.2 in January, marking 17 months above the 50 threshold denoting expansion while manufacturing PMI eased slightly to 56.9. But more significantly, the input price component of the report surged to a 79.8 from 74.1 previously, the largest increase on record since the report's inception in 1997. The rise in input prices lent support to ECB President Trichet's warning over mounting inflation in the region which has eased. The euro should remain supported in the near term as price pressures and the ECB's potential monetary policy response overshadow worries over the fiscal health of member
countries.

GBP - Speculation over the monetary policy has been the significant driver of cable's strength thus far in January. The currency has rallied just over 3% since the first of the year as the market begins to expect higher rates. This sentiment has however waned in recent days, as current news has led the market to believe the tightening moves might be less aggressive. This week brings GDP tomorrow, with expectations being 0.5% for the 4th quarter, a slight decrease from 3Q. If it comes in stronger, look for a break above 1.6000.

JPY - USDJPY was essentially flat, trading in a notably tight range and essentially on top of its 50 and 100-day moving averages (83.06 and 83.04, respectively). Technicals are fairly bullish for USDJPY and there is an ongoing gap between Japanese and US interest rate spreads, which will likely send the dollar higher.

CAD - The CAD remains stronger than the USD, but began the week with a steep drop against all 16 of its major counterparts. The loonie stumbled as crude oil shed over $1/barrel after OPEC signaled it will boost production to meet increased global demand. If commodity prices, oil in particular, do stabilize, the CAD's recent run above parity with the USD may be short-lived. Last week, the BoC disappointed investors by leaving interest rates on hold and signaling that future tightening would be carefully considered with the country's economic recovery threatened by a strong currency. With CPI data due on Tuesday (expected at 0.1%), gains in the currency have mostly offset inflationary pressures, further supporting the BoC's recent dovish stance. Improving global investor sentiment, and strong economic data out of the US will however provide support for the CAD in the near term.

MXN - The Mexican peso gained modestly against the US dollar last week as the US posted better than expected housing and manufacturing data. However, domestic figures are pressuring the peso as Mexico's January core consumer prices rose less than expected (0.21% vs. the previous 0.30% and 0.27% eyed). On Jan 21, the central bank kept its benchmark interest rate unchanged at 4.5% for a 16th straight meeting, stating that a stronger peso had partially offset recent increases in some costs that were fueled by rising global prices for raw materials, further signaling the bank will begin raising rates towards the end of 2011.

AUD - The AUD starts little changed from where it ended last Friday after a volatile week of range-bound trade. Despite broad USD weakness, the AUD has been unable to break above the key parity level, with disappointing economic data providing formidable resistance. PPI data showed a mere 0.1% increase (QoQ), far short of the 1.3% registered last quarter, and the 0.5% expected for this reading. With CPI data on tap for later Monday afternoon (expected at 0.7%), investors fear that the strength of the AUD has eroded inflationary pressures, thus significantly reducing odds that the RBA will tighten policy any time soon. However, with relatively buoyant commodity prices, and generally improved sentiment about the health of the global economy, the dip from disappointing PPI, and potentially weak CPI, may only be temporary with the AUD's relatively high yield still attracting more than adequate demand.