US Dollar Advance Furthered By Data Supporting NFP, Growth Speculation

The dollar’s upside trajectory was maintained Wednesday, though its advance certainly lost some of its steam from yesterday. This tame volatility is likely a result of market participants yielding to major technical levels ahead of Friday’s non-farm payrolls release – which could easily generate the necessary movement needed to overcome the barriers encompassing many of the majors. However, while fundamental traders are battening down the hatches for the end of the week action, today’s data has actually shaped speculation for the NFP release and the more important growth outlook. The usual round of preliminary employment figures crossed the wires with mixed results. The ADP’s employment change report rose unexpectedly by 40,000 – the third consecutive improvement for the series. On the other hand, the Challenger job cuts indicator reported the biggest jump in plans to cut employees in over two years while the ISM services’ employment component fell back below the expansionary/contractionary 50 reading. There is a lot riding on the strength of consumer spending to help avoid a recession later in the year; so the employment number will no doubt color second quarter growth speculation. At the same time, the ISM non-manufacturing survey report is similarly as vital considering 85 percent of American jobs are in the service sector. And, though its employment component soured, the headline May reading revealed expansion thanks to an improvement in business activity and new orders.

Euro Consolidates Losses Ahead of Rate Decision, ECB’s Trichet Likely To Remain Hawkish

The euro did little but consolidate losses on Wednesday, as the currency traded within a 50 point range above 1.5425 for most of the day. Economic data from the Euro-zone gave traders little reason to buy the currency, as the purchasing managers’ index for the services sector was confirmed to have fallen to 50.6 in May from 52.0 the month prior, which is dangerously close to signaling stagnating conditions. Meanwhile, retail sales in the Euro-zone tumbled 0.6 percent during the month of April – missing expectations of a 0.2 percent gain – as consumption falls in line with sentiment in the region. Indeed, we’ve seen various measures of consumer and investor confidence slump in recent months as energy and food prices skyrocket, so it is not entirely surprising to see spending falter. However, this slowdown in the Euro-zone economy will not be enough to convince the European Central Bank to cut rates on Thursday. Indeed, the ECB is widely expected to leave rates steady at 4.00 percent given rocketing global price pressures that have pushed CPI well above the bank’s 2 percent target to 3.6 percent. However, traders will need to listen to ECB President Trichet’s post-meeting press conference, as a pronounced focus on price stability and downplaying of deteriorating economic conditions could actually lead EUR/USD to rally.

British Pound Slumps As UK Services Sector Contracts, BOE Expected To Leave Rates Steady

The British pound continued to ease lower, though the currency traded near 1.9550 during most of the US trading session, as the UK purchasing managers’ index for the services firms unexpectedly fell below 50 to 49.8, signaling contraction in the sector. Clearly, domestic demand is waning and contributing to a broad slowdown throughout the UK economy. Meanwhile, Bradford & Bingley - the UK's largest lender to landlords – announced this week that they would sell shares at a 33 percent discount amidst deteriorating housing market conditions, suggesting that the financial markets remain very unstable. Will it be enough to convince the Bank of England to cut rates on Thursday morning? No. Like the ECB, the BOE is grappling with surging consumer prices, as CPI jumped to an annual rate of 3.0 percent during the month of April, which is significantly higher than the Monetary Policy Committee’s 2 percent target. Furthermore, the figure is dangerously close to the point at which BOE Governor Mervyn King would have to write a letter to Chancellor of the Exchequer Alistair Darling explaining how inflation had gotten so out of control, and how he plans on bringing it back to target. As a result, the majority of the MPC is expected to vote in favor of leaving rates steady at 5.00 percent. However, the British pound could actually rally on the decision, especially as the currency has tumbled ahead of the meeting.

Commodity Dollars: Aussie Jumps On GDP, Kiwi Plummets As Rate Cuts Come Into View

Despite a lack of volatility in commodity prices, the comm bloc saw incredible moves across the board. The Aussie dollar received its last burst of fundamentally-driven price action from the release of a stronger than expected 1Q GDP release. Growth was expected to slow to an annualized 2.8 percent clip, making the 3.6 percent reading a considerable surprise. Coming out in the late US session, the RBNZ rate decision led to a sharp drop in the kiwi. Though Governor Bollard did not change rates from its 8.25 percent post, he explicitly opened the door to a cut when he said “we are now likely to be in a position to lower the OCR later this year.” Finally, the loonie would similarly experience a steep drop against the dollar, though there was no fundamental push. Tomorrow’s Ivey PMI may sustain this high volatility.

Japanese Yen Teeters As Markets Remain Uneasy

The Japanese yen was mixed across the majors today, as the currency gave up early morning gains over the course of the US trading session. Indeed, the markets remain uneasy, and thus, are not quite ready to pile back into risky assets quite yet. Investors are not wholly confident that conditions in the credit market are improving, and news that Moody's would place bond insurers MBIA and Ambac on review for a downgrade and S&P's announcement that it will remove Ambac from the S&P 500 on June 10 certainly did not help. As a result, traders should beware of looming risk aversion, as the Japanese yen will respond most violently to shifts in risk appetite.

Kathy Lien is the Chief Currency Strategist at FXCM.