• All Eyes on Trichet Tomorrow
• Pound Bulls Looking for Higher Inflation Forecasts by BoE
• Japanese Government Officials Becoming More Concerned About Yen

US Dollar
It has been a quiet trading day today with Federal Reserve Chairman Ben Bernanke avoiding any comments on the economy or monetary policy in his speech earlier this morning.  It appears that he does not want to bring any more attention to his recent comments for a pause in the central bank's interest rate cycle * perhaps signaling that he is comfortable with Maria Bartiromo's comments.  Meanwhile the US dollar lost ground against all of the majors except for the Japanese Yen and the Canadian dollar despite another dose of stronger economic data. Echoing the rise in yesterday's manufacturing sector ISM report, non-manufacturing ISM also jumped from 60.5 to 63.0 with a similarly large rise in the prices paid component of the report.  Factory orders also rose by a more than expected 4.2 percent while oil prices dropped over $2 on a larger fuel supply report.  When the market ignores repeatedly good economic reports, it becomes clear how strong of a hold bears have on the dollar at the moment.  The dollar is weaker against the Aussie and Kiwi following Australia's interest rate hike, but the divergence in its performance against the Yen and the Euro suggests that all eyes are now on the European Central Bank's interest rate decision tomorrow.  As we mentioned yesterday, the market is pretty divided on whether they expect hawkish or dovish comments from the central bank President.  It is believed that Medley Global Advisors, a newsletter service closely followed by hedge funds thinks that the ECB will be dovish while many bank analysts expect them to be hawkish.  With respected experts on both sides of the spectrum, we warn once again to be prepared for some nice volatility tomorrow morning.  Once that is out of the way, the market will immediately shift gears to Friday's non-farm payrolls report.  The employment components of the ISM surveys and recent jobless claim reports suggest another month of strong performance for the labor market with US companies adding on another 200,000 jobs.  However, given the market's lack of reaction to other strong reports that have been recently released, it is quite possible that the upcoming NFP report could be more of a non-event unless of course it deviates from expectations by 50k or more. 

Euro
With no economic data on tap today, the Euro strengthened slightly against the US dollar but failed to breach Monday's high once again. The central question that ECB President Trichet will answer for us tomorrow morning is how comfortable he is with the current level in the Euro.  We have long said that the stronger the Euro, the bigger the strain on the Eurozone economy.  Admittedly, many bank analysts are arguing that recent economic data has been fairly strong, but as any central bank President should know, the effects of currencies tend to be delayed.  Therefore in order to prevent a sharp slowdown, it is important to be proactive rather than reactive.  In the past, the ECB has shown grave concern for a rapid rise in their currency and have been fairly vocal about it.  However, this time around, it is interesting that we have barely heard a peep from central bank officials.  Perhaps inflationary pressures from rising energy prices are becoming very worrisome for them at this point.  Either way, we do not expect an interest rate hike tomorrow and we still do expect a quarter point rate hike in June.  Beyond that, it is fair game.  If Trichet tones down his comments, we could easily see a move down to 1.25.  On the flip side, if he remains hawkish, the Euro could take stab at breaking its most recent Monday high.

British Pound
The British pound continued to churn higher against the US dollar but gave back some of its gains against the Euro.  The pound has been one of the best performing currency pairs this week thanks to a handful of good economic data and continued interest in pound denominated investments. In the first quarter, merger and acquisition activity was the most aggressive in 4.5 years.  We also recently reported that Middle East investment in UK commercial property doubled last year.  However after a wave of good news, today's reports were less optimistic.  In contrast to yesterday's sharp rise in construction sector PMI, service sector PMI fell from 54.7 to 53.7.  Most worrisome was the housing market component which also slipped last month and conflicts with other recent reports indicating stabilization in the sector.  On top of that, the BRC shop price index declined in the month of April while wage growth slowed suggesting moderation in the economy's gradual recovery.  Pound traders continue to closely await the central bank's Quarterly Inflation report tomorrow. Given the rise in energy prices, the central bank could notch higher their inflation forecasts, which would be a green light for the market to take the GBP/USD above 1.85.

Japanese Yen
With Japan out for holidays, the yen sold off against all of the majors except for the US dollar.  If you haven't realized it yet by reading our commentary, the yen's price action against the dollar has diverged significantly from its move against any of the other currencies. Japanese Finance Minister Tanigaki retreated today that the G7 statement is not calling for a decline in the dollar.  Whether that is true or not, we do not know since the G7 comments were quite clear.  However, it is now obvious that the government is becoming increasingly nervous about the value of the yen, especially since they should be on holiday.

Kathy Lien is the Chief Currency Strategist at FXCM.