US Dollar
It has been a great day for the US dollar.  The greenback rallied against all of the major currencies,  delivering to us the biggest one day move among most of the majors this week.  However, despite the strength of today's move, we are still only probing key support and resistance levels in most of the  dollar-based currency pairs.  The market looks ripe for a break, but we rather react to one than to  predict it especially since the 1.2550 lower band in the EUR/USD is an extremely significant support  level.  Two pieces of US economic data were released this morning, namely jobless claims and leading  indicators.  Claims came in slightly higher than expected, but remain at very low levels. In general, jobless claims below 325k is seen as good.  However the level of claims does not matter if US  companies are not adding jobs.  Claims simply tell us how many people companies are laying off.  With  the economic outlook uncertain, many companies may simply be in wait-and-see mode by opting to freeze or limit hiring for the time being.  Leading indicators also disappointed, falling by 0.6 percent in the&n bsp; month of May.  This is yet another piece of evidence that the economy is slowing.  Meanwhile, Federal  Reserve President Guynn announced plans to retire on October 1, 2006. Traditionally seen as one of the more hawkish voters in the monetary policy committee, his departure comes at a turning point for the current tightening cycle; and if he is not replaced with another hawk, we could see a tip in the Fed balance of opinion.

Euro
The euro was sent into a steep descent against the dollar in its namesake session after a few indicators, ones not usually heeded by traders, printed lower than their respective consensuses.  Italian consumer confidence, trade and retail sales opened the fundamental gates.  Italian consumer sentiment for the current month dropped unexpectedly from a 107.6 read to 106.8, despite the jobless rate falling to a decade low 7.4 percent in the first quarter, as unrelenting gasoline prices gouged disposable incomes. The Italian deficit proved less of a selling point, posting a €1.608 billion deficit with countries outside of the European Union versus a upwardly revised €1.763 billion shortfall in April.  Finally , sparking conclusive bullishness for the economy, April retail sales grew 0.6 percent.  Stepping back for a broader view, Euro-zone industrial new orders capped off the newsflow out of the region.  Orders declined 0.2 percent in the month of April following a much quicker 1.6 percent decline the month before, while the annual measure slowed from 13.1 percent to 4.4 percent.  Much of the decline in orders was attributed to the usually volatile transportation equipment sector. Stripping industry orders of ships, railway and aerospace equipment revealed an actual 2.3 percent rise for the zone. Rounding us out on rate speculation fodder, ECB Governing Council member Erkki Liikanen followed up on Trichet's recent hawkish comments, by saying Thursday, "[r]isks to inflation are on the upside" and vigilance should be kept to ensure "the highest rates o f crises years will never be seen again."

British Pound
Originally content to quietly range trade, the British pound took a sharp nosedive after the Bank of England announced that monetary policy committee member Walton died last night.  Coming a day after the minutes revealed that he was the solitary member voting in favor of a quarter point rate hike at the last meeting, it  is no surprise that traders have taken this news as a significantly pound bearish development.  Aside  from the loss of a well respected man, Walton's death also means that without him, the committee's decision to leave rates unchanged would have been unanimous.  In less than a few months, the BoE has seen the departure of two monetary policy members - Lambert in May and now Walton.  The MPC is now left  with seven members, with Blanchflower still a rookie after replacing Nickell earlier this year.  This  should delay any potential movements from a central bank that has already signaled cautiousness.

Japanese Yen
The Japanese Yen broke out of its quiet overnight trading range at the onset of US trading.  Rumors that  Bank of Japan Governor Fukui could be forced to resign over the next few days has been interpreted as extremely yen bearish.  Fukui was one of the biggest advocates for removing the country's zero interest rate policy and if he does resign, it will postpone any potential changes they would have made to  monetary policy.  Though pushing Fukui to resign for a scandal that he cannot be completely blamed for seems a bit rash, face is  extremely important in Japanese culture.  In addition to Fukui's rumors, the build-up of tensions around North Korea is also hurting the yen.  There was talk last night of spy planes being shot down and Japan dispatching ships and planes to monitor North Korea. Politics seems to be certainly trumping economics in Japan. Both North Korea and the Fukui scandal are at tipping points.  They  could just as easily blow over or actually become far bigger problems.  Regardless, it is important to note that EUR/JPY is trading at an all-time high while USD/JPY is attempting to break out of a tight  trading range.

Kathy Lien is the Chief Currency Strategist at FXCM.