Today’s markets have seen some of the most sustained inactivity in months. With US equity markets closed and new economic data at a minimum, the currency market decided to take a breath and allow time for this week’s developments to filter through. We are left with some time to further contemplate the notion of whether or not we are in the midsts of a bear market rally or a complete market reversal. The yen strengthens by less than 40 pips while the pound was virtually unchanged today. The euro advanced by about 60 pips, hardly making up for this week’s 400 pips in losses. Among commodity currencies, the big mover was USD/CAD, rising by about 20 pips.

The U.S. dollar has ended the week lower against all higher yielding currencies as the actions by Washington and leaders of the 20 largest economies have helped to restore risk appetite. USD/JPY which tracks the market’s sentiment broke 100, to trade at the highest level since November. The fate of the dollar in the week ahead will be largely dependent upon whether we are at a turning point in the global recession or if investors have been misled by false expectations.

For the Federal Reserve, who will be making a monetary policy decision tomorrow, the uptick in the housing market and the tepid inflation pressures are welcome improvements, reducing their need to jump the gun and announce a new program to buy long term U.S. Treasuries.

It was not entirely surprising that US consumer prices rose 0.3 percent in the month of January considering a similar rise in producer prices reported yesterday.

The US dollar strengthened briefly following this morning's inflation and employment reports. Headline producer prices rose for the first time since August while core prices increased 0.4 percent.

Euro and pound were generally range bound in early European trade as the currency market awaited rate decisions from both the BoE and the ECB due 12:00 and 12:45 GMT respectively. With economic calendar essentially barren trading was likely to remain choppy as EUR/USD tried to hold on to the 1.2800 level while cable consolidated around 1.4400.

Tomorrow’s ECB rate announcement due 12:00GMT is shaping up to be one of the key events in the central bank’s ten year history. With Euro-zone economy facing one of the worst economic slowdowns in decades Mr. Trichet and the governing council are under enormous pressure to abandon his ”Bundesbanke-like” rhetoric and begin to ease aggressively.