US Dollar
Based upon on the US economic data that we have received thus far, Friday’s non-farm payrolls release runs the risk of coming in sluggish.  Yesterday we saw a drop in consumer confidence and today the ADP employment forecast fell far short expectations.  Even though the ADP report over forecasted payrolls in the month of June and under forecasted it in the month of July, the report still has an above 80 percent positive correlation with non-farm payrolls.  However with only a modest rise in the Euro over the past few days, traders may not be completely convinced or prepared for a weak non-farm payrolls report.  The CME’s first non-farm payrolls derivatives auction settled at 120.3k which is pretty much in line with the current consensus forecast of 125k.  Aside from ADP, we also had second quarter GDP released this morning.  Although headline GDP was revised up from 2.5 percent to 2.9 percent, the revision was slightly less than what the market was looking for.  In addition, core PCE growth was also slightly lower, which means that we saw less inflationary pressures in the second quarter.  The details of the report were not as grim with wage and salary growth revised higher.  Overall, the report does little to shift the market’s expectations for another pause by the Federal Reserve in September which explains the muted reaction to both reports in the currency market.  The drop in oil prices is reducing global inflationary pressure at a time when the housing market is showing greater signs of weakness.  The shift in the economic outlook will tempt the Federal Reserve to be more lenient with monetary policy for the next few months.  If they felt that there were no major risks to delaying a rate hike in early August, when oil prices were trading around $75 a barrel, we doubt that they would have any problems delaying it even further with oil price trading at $70 a barrel.  There continues to be a great deal of US economic data due for release tomorrow.  Although we think that the main event will be the ECB Press Conference, the core PCE deflator and the Chicago PMI report may be worth watching.  Neither is expected to change significantly, but with the risks of the PCE coming in lower and the fact that the Chicago PMI is used to forecast ISM, any surprises could cause sharp movements in the currency market.

Euro
Euro traders will need to pay particular attention to the comments from ECB President Trichet tomorrow morning.  Since the last monetary policy meeting earlier this month, we have heard limited comments from Eurozone officials.  The few that we have heard from have reiterated the central bank’s prior concern about inflation which means that for the most part, they remain hawkish.  However, it undeniable that inflationary indicators are beginning to come in below expectations around the world as oil prices ease.  Therefore, it is quite possible that ECB President Trichet will soften his desire to aggressively remove the region’s accommodative monetary policy.  Having already raised rates earlier this month, the central bank is not expected to raise them again tomorrow.  However the market is still pricing in at least one more quarter point rate hike before the year’s end and traders will be looking to Trichet for an answer to whether this additional interest rate hike will come in September or much later in the year, if at all.  Meanwhile French unemployment which was originally due for release tomorrow morning but it was leaked this afternoon.  The report indicated that the unemployment rate improved from 9.0 percent to 8.9 percent as the number of unemployed individuals dropped by another 29k in the month of July.  Germany is expected to report another drop in their own base of unemployed people during the month of August tomorrow.  The size of the drop should be sharply smaller than the 84k improvement that we saw in July as the World Cup effect fades. 

British Pound
Although money supply data came in softer this morning, firmer housing market reports continue to support gains in the British pound.  Housing has always been a big priority for the Bank of England since they know that consumer spending can at times be very closely tied to housing.  Both mortgage approvals and consumer credit ticked higher in the month of July, confirming the sector’s continual rebound. In addition, the CBI Distributive trades survey, which was originally predicted to have dropped in the month of August actually surprised to the upside.  The rise is yet another piece of evidence that the UK economy is improving and the Bank of England has done a fantastic job of juggling growth and inflation.  At this point, with inflationary pressures subsiding, they are most likely in no rush to tighten the economy anytime soon. 

Japanese Yen
Another dose of weaker economic data has sent the Japanese Yen tumbling. Retail sales fell 1.7 percent in the month of July, which was a larger drop than the market’s 1.2 percent forecast.  Labor cash earnings fell by 0.1 percent, which was the first drop in six months.  Although bad weather accounted for a part of the shortfall in spending, recent economic data from Japan has been disappointing. EUR/JPY is trading at a fresh record high while GBP/JPY and CHF/JPY are trading at a seven year highs.   USD/JPY also joined in the rally, but gains were limited as the currency pair remains stuck in a tight trading range.   More Japanese data is due for release tonight and judging from the forecasts, more weakness is expected.

Kathy Lien is the Chief Currency Strategist at FXCM.