• Payroll Jitters Could Limit Dollar Weakness
• Market Still Holding Out for Hawkish Comments from ECB
• UK Hit By Weaker Economic Data

US Dollar
Today marks the third day of weakness in the US dollar.  In fact, the greenback lost ground against all of the majors including the commodity currencies, which benefited from a new record high in gold prices.  The New Zealand dollar actually experienced the greatest recovery after selling off significantly over the past three months.  The extension of dollar weakness comes on the heels of a strong non-manufacturing ISM report.  Expected to initially dip to 59.0 from 60.1, the non-manufacturing ISM actually rose to 60.5.  Interestingly enough, the prices paid component dipped, giving the market a reason to doubt the strength of the report.  We mentioned yesterday that the service sector has been holding up far better than the manufacturing sector.  This suggested that a stronger service sector ISM report would not have been particularly surprising.  The weaker prices paid component comes in contrast to the stronger inflation readings reflected in the manufacturing sector ISM report released earlier this week.  At a time when the market already doubts the Federal Reserve's optimism and hawkishness, this is not good news.  Yet losses could be limited here on forward as the market preps itself for non-farm payrolls on Friday.  US Treasury Secretary Snow was on the wires today talking up the report. He said that the upcoming March employment report should show "some good numbers."  The market is currently forecasting 190,000 jobs to have been created last month.  This would follow the 243,000 jobs that were created in February.  At this point, the dollar really needs a strong jobs report because the remaining dollar bulls may be simply holding out for this release.  If job growth fails to deliver, then we could see the barriers to a fresh year to date high in the EUR/USD being lifted. 

Euro
We saw another strong day in the EUR/USD today as the currency pair continues to close in on its 6 month high.  The European central bank is scheduled to make a monetary policy announcement tomorrow.  An interest rate hike is not expected, but the rumor is that the ECB could signal the possibility of another rate hike in May.  Today's economic reports however suggest otherwise.  Retail sales fell 0.2 percent in February despite growing 1.0 percent year over year.  Sales in January were also downwardly revised from 0.8 percent to 0.5 percent.  In addition, even though the Eurozone service sector PMI survey remained unchanged at 58.2, the performance of the individual countries were quite surprising.  As the traditional leader in growth, Germany's service sector index actually fell in March from 57.8 to 56.6. Italy and France on the other hand saw acceleration in growth for their own service sectors.  For once, we may actually see France and Italy catch up to the expansion that we have been seeing in Germany.  The diverging performance and unchanged regional index should have little impact on the ECB's rate decision.  Euribor futures are showing at least four more rate hikes before year end.  This suggests that once the Federal Reserve is finished tightening, the ECB's continued rate hikes could draw quite a bit of attention. 
 
British Pound
True reflection of how the UK economy is performing in comparison to other countries is reflected far betting in the EUR/GBP cross than the GBP/USD currency pair these days. Despite weaker economic data, broad dollar weakness ended up pushing the British pound higher.  Against the Euro however, the British pound hit a one year low.  The UK reported a slew of disappointing economic data this morning.  The service sector PMI index dropped from 58.9 to 57.4, which was worse than expected. Industrial and manufacturing production, which were both predicted to increase actually dipped in the month of February with corresponding downward revisions to the January data as well.  Both monthly and annualized growth for both reports came in weaker than expected. It seems that the housing market is the primary sector of the economy that is delivering healthier reports.  Most other sectors are still showing signs of weakness.  The BRC shop price index also reported lower prices in the month of March.  This is certainly not enviable going into the Bank of England monetary policy meeting tomorrow.  The BoE will be leaving interest rates unchanged once again as economic data continues to come in mixed. 

Japanese Yen
The Japanese Yen strengthened against the US dollar for the third consecutive day but most of the overnight gains were given back in the early European trading session.  For the time being, USD/JPY remains trapped in a tight range, but the longer that we stay in this range, the higher the likelihood for a substantial breakout.  The direction is not crystal clear with higher US rates contending with more hawkish Japanese monetary policy.  On top of that, foreign interest in Japanese investments is being offset by fresh investment outflow by the Japanese.  The bigger story for the Yen have been in the crosses.  EUR/JPY is trading at the highest level since the inception of the Euro.  In fact, both AUD/JPY and CHF/JPY have shown strong gains over the past few days.

Kathy Lien is the Chief Currency Strategist at FXCM.