The last 2 weeks of August is always a painstakingly quiet time in the currency market. European traders are off on their month long holidays while US traders are more worried about taking their kids to college and planning for the Labor Day holiday than taking on risk. The consolidation that we have seen in the currency market over the past few trading days is evidence of the declining volume in the marketplace. After selling off yesterday, the greenback has recovered against all of the major currencies. Stocks have been unusually volatile as oil prices oscillate between positive and negative territory. The biggest story in the markets this week is the problems in the financial sector. Fannie Mae and Freddie Mac shares continue to get pummeled as the market continues to discount the possibility of a government bailout which would be good for economy and eventually the US dollar but not so good for Fannie and Freddie shareholders. Yesterday, Freddie issued 5 year notes at 113bp over Treasuries, which is a higher premium than their cost of borrowing after the Bear Stearns debacle in March. This indicates that credit concerns are still running high across the financial markets. However there is hope. The US government is not going to just let Fannie and Freddie die. Recent comments from the Treasury and the Federal Reserve indicate that they are keeping a close eye on the 2 big mortgage giants. The FDIC has also announced a rescue plan for IndyMac mortgages which will certainly help thousands of homeowners. Also, there is talk that China is considering a fiscal stimulus package. As the primary engine for growth over the past few years, this would be huge for the financial markets. One of the greatest fears has been a post Olympic slowdown, but a fiscal stimulus could keep the Chinese economy and by extension, the global economy going. We are also closely watching the retail sector. Earnings have been tepid suggesting weak retail sales this month, but retailers are pulling out all the stops with General Motors extending warranty and relaunching their previously successful employees discount program while eBay is making changes to their fee structure to boost fixed price sales. The dollar could extend its gains tomorrow with the Philadelphia Fed index and leading indicators due for release.

Data Call on the Philadelphia Fed index and the Leading Indicators Report (14:00 GMT): Dollar Bullish

British Pound: Could be in for More Losse

The British pound could be in for more losses ahead of Thursday’s retail sales report. The market remains extremely bearish pounds after the dovish Bank of England minutes and the sharp drop in the CBI Industrial Trends survey.