US Dollar
The US dollar has given back some of its gains as we head into Fridayâ�,��"�s non-farm payrolls release.  The strong ADP employment forecast from yesterday had many traders believing that we would see exceptionally strong job growth in the month of June.  However, such optimism was put to test today after the release of the ISM non-manufacturing index.  The service sector activity index moderated from 60.1 to 57.0, but this was not the main concern.  Instead, it was the sharp drop in the employment component of the report from 58 to 52 that has the market now worried about whether the ADP numbers were correctly calculated. The last time we saw a drop this large was between June and July of 2004 and looking back to the month of July, non-payrolls were an abysmal 38k.  Coincidently enough, the forecast at the time was 240k.  Today, the forecast is not as large, but just as optimistic which raises the question of what we should believe more - the ISM or the ADP report? If you recall, on Monday, the employment component of the ISM manufacturing index also fell from 52.9 to 48.7 but analysts wrote that off as having an impact on the manufacturing portion of the payrolls report and not the headline index.  However, now with the expansion in the service sector labor market moderating significantly as well, a potentially weaker number is just as likely as a stronger one.  The two conflicting reports tell us that there will certainly be a lot of volatility tomorrow and raises the likelihood of payrolls coming out somewhere between 140-180k, which is not far from the marketâ�,��"�s forecast.  We do not think that it is going to be as horrid as the July 2004 number since jobless claims have been very low.  Just today, we saw another print below 325k at 313k for the week ending July 1st.  As we said yesterday, handicapping the report is really a coin toss and we prefer to concentrate on our reaction to the release.  A weak number will probably have the most significant impact on the EUR/USD currency pair after todayâ�,��"�s extremely hawkish comments from the European Central Bank, but also be careful of any revisions for the month of May.

Euro
The Euro has resumed its climbed today after extremely hawkish comments from the European Central bank chief.   Even though interest rates were left unchanged at 2.75 percent, there were two things that made ECB President Trichetâ�,��"�s comments far more bullish for the Euro over the longer term than the market was initially anticipating.  The first is that Trichet not only reintroduced the word vigilance, but he said that the central bank needed to exercise â�,��"strong vigilance.â�,�  His words are far tougher than before and raise the risk that if tomorrowâ�,��"�s US non-farm payrolls fails to meet expectations, we could see 1.30 in the EUR/USD because the ECB would be left as the only one of the two central banks to still be aggressively raising interest rates.  Over the longer term though, we will probably see at least two if not even three more interest rate hikes this year.  We are sure that the recent retracement in the Euro helped to give the ECB more breathing to be more hawkish than they would have otherwise been if the EUR/USD was trading at 1.29.  The second extremely bullish thing was Trichetâ�,��"�s announcement that the monetary policy committee will now be holding a physical meeting on August 3rd instead of a conference call and they will top it off with a press conference afterwards.  August tends be a time when Europeans relax and go on holiday, but the decision today shows the ECBâ�,��"�s dedication to being vigilant towards inflationary pressures and the degree of concern they have at the moment.  It seems that at this point, we could see either see a 50bp hike in August or one quarter point hike in early August followed by another one in September.  Either way, it is Euro positive and will be even more so if US data is weak tomorrow. 

British Pound
The British pound is stronger against the US dollar today and weaker against the Euro.  The British poundâ�,��"�s performance against the Euro is really at risk now with the widening divergence between the two countriesâ�,��"� monetary policies.  As expected, the Bank of England left interest rates unchanged at 4.50 percent.  We do not get to receive the minutes from the meeting that could shed more light on which way the members are swaying until July 19th, but based upon recent economic data, the BoE has no other reason to remain anything but neutral.  Industrial production increased a less than expected 0.3 percent in the month of May, bringing the annualized pace of growth down by a worse than expected 0.7 percent.  Manufacturing production was stronger, but not enough to reverse sentiment.  House prices as measured by Halifax also saw a sharper than expected drop of 1.2 percent compared to a 0.1 percent rise in May.  Overall, data from the UK is mixed and has been mixed for some time, which means that we will probably see little pound dominated movements until July 19th.

Japanese Yen
The Japanese Yen is stronger as the market continues to contemplate the possibility of an interest rate hike by the central bank next week.  Though still unlikely, it is enough to help offset any pessimism from the North Korean situation.  The economy continues to do well with leading indicators rising from 54.5 percent to 75.0 percent in the month of May.  Foreign investors were net buyers of Japanese stocks for the first time in four weeks, which is quite promising as the Nikkei recovers from the 20 percent slide it saw between the first week of May to the second week of June.  Talk of Chinese revaluation is also continuing as the countryâ�,��"�s economist say that they cannot rule out a large jump in the value of Yuan.  As usual, more speculation about revaluation has been positive for the Japanese Yen. 

Kathy Lien is the Chief Currency Strategist at FXCM.