• Sharp Sell off in the Dollar Ahead of US Non-Farm Payrolls
• EUR/USD SSI Ratio Flips, Signaling More Gains Ahead
• Hawkish Comments from ECB Trichet Boosts Euro

US Dollar
Today was definitely an exciting day in the forex market as we saw breakout moves in all of the major currency pairs.  Last week's rally in the US dollar was completely erased by today's one-day sell-off.   What is most interesting though is the lack of any meaningful fundamental catalyst.   Dollar bears just kept on pounding the greenback lower as the move extended further and further on an hourly basis with virtually no retracement.  US jobless claims came in weaker than expected which could have contributed to the shift in dollar sentiment, but the $1.42 slide in oil prices should have offset some of the pessimism.  Oil prices are now but a stone's throw away from $60 a barrel.  The primary basis for the move today can really be summed up in two words - position adjustment.  With the uncertainty surrounding tomorrow's non-farm payrolls report, it seems as if a good portion of traders are simply staying out of the markets ahead of what will surely be a volatile number.  Dollar bears could also have been waiting on the sidelines for the very last moment to sell off the dollar, taking the opportunity to use the stops of dollar bulls to exacerbate their move high.  In the non-farm payrolls preview that was posted yesterday, we said that there are risks for both a stronger number or weaker number.  On top of that though, regardless of how the number is released, there are enough arguments out there for both bulls and bears to use to discount the significance of the report.  This will make forecasting the price action after the non-farm payrolls release all that more difficult.  Yesterday we had said that with the market extremely long dollars, a weaker number would probably cause a bigger move in the EURUSD than a stronger number.  Today's move however makes the potential reaction much more unclear. For the time being, it will certainly be interesting to see if dollar bears can hold onto their control tomorrow. 

Euro
Despite some bad economic data out of the Eurozone, hawkish comments from ECB President Trichet and progress on the German political front has helped to push the Euro higher against the dollar.  The ECB left interest rates unchanged today at 2.00% which was in line with expectations.  However, ECB Trichet, who is usually a hawk, anyway was even more hawkish today than he has previously been.  Instead of saying that "particular vigilance" is needed, he said that there should be "strong vigilance" with regards to inflation.  To his credit, the central bank president did specifically point out that this is not a pre-announcement for a rate hike but he did indicate that the ECB discussed the possibility of a rate hike.  All in, we know that a rate cut is far off the table with a rate hike a growing possibility.  Meanwhile, retail PMI edged lower in the Eurozone during the month of September, led primarily by a drop in sales in Germany.  Factory orders also tumbled significantly during the month of August.  Meanwhile, in the political arena, the end to Germany's political stalement could to be right around the corner with Schroeder and Merkel meeting tonight to try to reach an agreement on who will be the next Chancellor.  It is also important to mention that the FXCM Speculative Sentiment Index just flipped to net short this afternoon with the USDCHF ratio confirming the EURUSD signal.  As a contrarian indicator, this suggests that there could be more gains ahead for the EURUSD.

British Pound
The Bank of England kept interest rates unchanged at 4.50%.  This is the second consecutive month in which rates were unchanged since August when the Monetary Policy Committee cut interest rates by 25 basis points to stimulate economic growth.  Although the GBPUSD rose primarily on dollar weakness, the central bank's decision certainly helped to push the currency pair higher.  Earlier in the day, the pound lost strength from an unexpected drop in production statistics but it was able to regain all of this loss, ending the day up over 130 pips.  Economists believe that the MPC is waiting for more information on whether the August cut positively impacted the strength of the economy before moving again and they were also concerned about rising inflation.  The decision in August was based on a 5 to 4 vote with half of the committee more worried about aggravating inflation and others firmly set on spurring growth in the economy.  This month's economic releases did not relieve the tensions of this split, with inflation above the 2 percent target rate at 2.4 percent, low national economic growth, and less than luster consumer spending and confidence.  Some members, however who voted for the cut in August are hinting that the Bank's forecasts may be too optimistic due to continuously subdued consumer spending and that the MPC may just need to be patient.  Exact details of the meeting will not be known until the minutes are released in two weeks on October 19.

Japanese Yen
There were no economic data released out of Japan today yet the Japanese Yen strengthened significantly against the dollar. The strengthening of the yen was really a weakening of the dollar on all fronts due to higher than expected jobless numbers released this morning right before the New York markets opened, spurring an early sell-off in the dollar.  Jobless claims are now reflecting unemployment caused by Hurricanes Katrina and Rita and with new claims coming in more than expected, speculation of a slow growth and harder recovery in the coming months for the US is being kindled.  The Nikkei tumbled today tracking the slide in the US stock markets. Tonight we will be expecting some household spending numbers from Japan.  Improvements in job conditions could help boost spending, but economists seem to be predicting the fourth consecutive contraction in spending.

Kathy Lien is the Chief Currency Strategist at FXCM.