At any given time there can be different investor attitudes dominating the forex market.  During the fall of 2008 when the Global Credit Crisis exploded around the world, risk aversion was the investor attitude that dominated financial markets.  In risk aversion mode, investors are not concerned with finding yield and growth; instead, their primary concern is preservation of capital.  They are not so much concerned with making money as they with not losing the money they do have.  When risk aversion dominates financial markets, the U.S. Dollar tends to get very strong because in times of economic distress, United States Treasury Bills are the safest place to be.  The chance of sovereign default is so small in the U.S. that T-bills are basically seen as a guaranteed risk-free investment.  Thus, during times of risk aversion, the Dollar gets strong.

However, as fear abates and the economy gains solid footing, investors once again become concerned with earning yield for their clients; therefore, they tend to take capital out of the safe-haven investments in the U.S. Dollar and Japanese Yen and place their capital in higher-yielding currencies such as the Euro, Pound, and Aussie, for example.  This market dynamic is referred to as risk appetite.  Generally over the last two years, one of these two investor mindsets has been ruling the forex market at any given time.  Here's the breakdown of which currencies move during which risk mode:

Risk Aversion                  
Strong Currencies:    U.S. Dollar, Japanese Yen, Swiss Franc 
Weak Currencies:    Euro, Pound, Aussie, New Zeland Dollar 
 
Risk Appetite
Strong Currencies:    Euro, Pound, Aussie, New Zeland Dollar 
Weak Currencies:    U.S. Dollar, Japanese Yen, Swiss Franc    

During the last two years, this correlation between risk appetite and risk aversion has been quite constant and quite strong, and it has made it somewhat easy to understand currency movements.  Now, however, this correlation is breaking down.  Several times in the last few weeks we have seen currency pairs such as the EUR/USD and GBP/USD diverge and make opposite movements.  This is a definite departure from the normal behavior of the last two years.

So What Is Driving Currency Movement Now?

At the outset of the 2008 Global Credit Crisis, every country was in trouble and facing the possibility of a major meltdown.  You could say that every developed nation entered recession at the same pace-really fast!  The story is not the same as countries emerge from recession, though.  Some countries are emerging at much faster speeds than other countries, and this divergence in the economic well-being of nations is beginning to draw investors' interest.  Now, instead of focusing on risk appetite and risk aversion, investors are beginning to focus on relative growth in each nation.  This focus on relative growth is causing a breakdown of the previous correlation and it is causing a breakdown in the daily moves of currency pairs.  Let's examine the U.S. Dollar versus both the Pound and Euro to see this more clearly.
 Note: Past performance is not indicative of future results.
As you can see in the chart above, the euro and pound both had very similar price behavior until we entered the area within the 2 black lines.  In that area, which spans the last few weeks, you can see that price movements have diverged.  The euro has a nice 4 bar rally up, followed by a nice 2 bar rally down before flattening out the last 3 days, while the pound just sat sideways.  Until these last few weeks that degree of divergence between the two pairs has not been common.  However, the economic outlook in these two areas is different, and investors are now focusing on relative growth.

Friday's London Action

Risk FX has rallied significantly during the London session as the euro, pound, New Zeland, and Aussie all staged very strong rallies against the dollar.  The rise in risk during the London session was due in part to the French Industrial Production figure that came out quite positive.  The number came out at 0.9% versus the expected 0.8%.  This better than expected figure is another piece of evidence that the EuroZone recovery is moving forward.  This positive note served to continue to bolster investor confidence and risk fx rallied accordingly.

China

Investors have been keeping a close eye on China over the last few months.  It is no secret that China's demand for Western goods and services is one of the primary reason that the 2008 Global Recession was not worse than it was.  Currently, the Chinese economy is undergoing a cooling period.  Investors knew this was coming.  Now, the concern is not that the Chinese economy is cooling; instead, investors want to make sure it is not cooling too much.  No one wants to see China come close to a recession.  There is an enormous amount of Chinese data due for release Friday evening well after market hours.

CPI and Retail Sales will be the two key releases that investors will assess in order to gauge the true state of the Chinese economy.  If CPI, a leading inflation indicator, comes out much higher than expected, that will actually be a negative sign for the Chinese economy.  That will indicate that there is still way too much steam in the Chinese economy and further stimulus may need to be removed from the economy.  That would lead to a longer period of time before China roars back to full-speed, and Western countries really need China to be operating at full-speed so that the China's demand can consume the West's abundant supply.

Western nations are dealing with severely decreased domestic demand and are therefore heavily dependent on demand from China.  Retail Sales will be a strong indicator of how consumers are operating in China.  China is not a consumer-based economy like the United States, and Retail Sales does not hold as much weight in China as it does in Western nations, but this figure will still help investors form a clearer picture of the true state of the Chinese economy.