Although Japanese economic data in the past few weeks has shown a marked improvement, USD/JPY continued higher in tonight's Asian session taking out option barriers at 118.20 and 118.50. It appears that the carry traders are back with a vengeance in the aftermath of the FOMC decision that now has the market targeting 5% Fed funds rates by mid 2006. For their part Japanese monetary officials only added fuel to the fire by refusing to set a time table for the removal of the Zero Interest Rate Policy. Deputy BOJ Governor Muto stated today that the conditions necessary to end the qualitative easing have not been met. The market anticipated that one or possibly two more months of positive Tokyo CPI data would  finally push the BOJ to move away from ZIRP, but Mr. Muto stated that nothing has been decided yet.

Mr. Muto' s comments cleared the way for dollar bulls to plow right back into the pair as his words practically assured the market that the yen will remain at 0% cost of funding for the foreseeable future. Still, with Japanese eco data improving, international pressures on the Japanese authorities to strengthen their currency may soon begin to exert themselves especially if the pair makes it back above the 120.00 figure. The outcry from US manufacturing base will become even louder if this Friday's NFP report shows sluggish growth.

We will be off the desk for the rest of the week, but we believe that the NFP this month may offer the moment of truth for the FX market. If the number prints above 200K, the Fed has the green light to go to 4.75% or possibly even 5% and EUR/USD could well probe the 1.1950 support on the news. If however, the number disappoints for the second month is row, the pressure on the Fed to halt - especially in the midst of an election year in the US - will become overwhelming. A poor NFP number will confirm that the weak Q4 GDP was not an outlier and that US may be teetering on the verge of a massive slowdown. As is so typical in FX Friday may bring a  reversal to the price action of this whole week.

Boris Schlossberg is a Senior Currency Strategist at FXCM.