US Dollar
Although it may initially seem that the US dollar is stronger today compared to yesterdayââ,¬â"¢s NY session close, it actually weakened significantly during the US trading session.  In contrast to the stronger Chicago PMI report released yesterday, manufacturing activity weakened nationally.  The ISM index fell from 57.3 to 54.4 in the month of May, which was below the marketââ,¬â"¢s 55.7 forecast.  The inflation component was higher but the labor component was weaker.  So far, nearly all of the leading indicators for tomorrowââ,¬â"¢s non-farm payrolls report such as yesterdayââ,¬â"¢s ADP and Hudson report have suggested that job growth may not actually be as strong as analysts are forecasting.  Even todayââ,¬â"¢s jobless claims report increased more than expected and with the contraction in the labor component of the ISM report and the Philly Fed survey, the odds are certainly favoring a downside surprise rather than an upside surprise.  Analysts have continually highballed the NFP number and with the release falling so far short of expectations last month, it wouldnââ,¬â"¢t be surprising to see them proven wrong once again. In each of the past three months, the so called experts have over forecasted payrolls.  Meanwhile the market is stalling at the moment and the consolidation in most of the major currency pairs suggests that a lot is hinging on NFP, which could be the make it or break it point for the dollar.  With more signs of slower growth in the US and an endless list of pressures that are weighing on the dollar, a disappointing number could trigger a much larger move in the currency market than a strong number could because it would mean that the Federal Reserve is that much closer to pulling the plug on rate hikes - all it needs is a number below 150.  However, in the off chance that companies did add jobs aggressively last month, then a quarter point interest rate hike later this month moves from being a coin toss to a near certainty. 

Euro
All is well in the Eurozone with economic activity continuing to accelerate.  Manufacturing activity in the Eurozone as measured by the PMI report increased to a six year high of 57.0 in May, led primarily by stronger performance in Germany and France. There was a bit of stalling in Italy, but the index still remains in expansionary territory.  Although it may be difficult to maintain this momentum going forward as the Euro and oil prices continue to stay at lofty levels, for the time being, it is hardly a concern for central bank officials.  The ECB has been so hawkish in recent weeks that the market is entertaining the possibility of a more aggressive 50 basis point rate hike next week.  If they do elect this option, it would come as a great surprise to the market, one that could easily push the EUR/USD to 1.30.  This possibility is quite real given the out performance of recent economic data.  In addition to the stronger PMI report this morning, the unemployment rate was also revised lower to 8.0 percent while GDP growth was confirmed at 0.6 percent for the first quarter.  Once again we want to point out the divergence between the interest rate expectations for the US and that of the Eurozone.  For the dollar, traders are now mulling over 0 or 25bp while for the Euro, the levels in question are 25 versus 50.  Given that the direction of interest rates is probably the number one driver of currency market movements, this difference is what will probably continue to fuel demand for the EUR/USD.  Meanwhile, Swiss economic data was also stronger than expected with first quarter GDP rising 0.9 percent and inflation increasing by 0.2 percent last month.  Even though the PMI index dipped, it fell less than expected last month.

British Pound
For the second day in a row, the British pound has sold off against both the US dollar and the Euro.  Unlike the Eurozone, manufacturing activity in the UK actually experienced slower growth last month.  The index, which was originally expected to rise, fell from a downwardly revised 54.0 to 53.2. Even though exports remained strong, new orders and output slipped. The previous trend of stronger data is now coming into question given the mixed reports that we have seen recently.  Although we are still looking for improvements in the months to come, the conflicting data pushes back expectations for an interest rate hike later this year.  Meanwhile, the British pound also came under pressure following news of an explosion at a chemical plan.  Investigations are still underway, but there is little talk of this being more than an accident. 

Japanese Yen
Unsurprisingly, we continue to report the diverging behavior of the Japanese Yen against the dollar versus the other major currencies.  USD/JPY is up for the day while the other yen crosses are lower.  Joining Standard and Poorââ,¬â"¢s, Moodyââ,¬â"¢s also raised its outlook for Japan from stable to positive.  This does not change the absolute rating of the country, but instead simply reflects a more optimistic outlook.  As we said when Standard and Pours made their move, although this is encouraging, it does little to attract more investment flow since the country is still rated below the minimum AA rating requirement of some investment funds.  Meanwhile Bank of Japan member Haru said the central needs to be cautious with ending their zero interest rate policy.  Even though it is within their game plan, they are in no rush to raise rates and do not want to catch the market by surprise.  As an export dependent country, Japan thrives on a weak Yen, which is the primary reason why they are being so careful.

Kathy Lien is the Chief Currency Strategist at FXCM.