US Dollar
According to a study that we published earlier this month, the two most market moving indicators for the US dollar are ISM and non-farm payrolls.  Tomorrow, we will not only be receiving both of these reports on the very same day, but also construction spending and the University of Michigan consumer confidence survey.  Unless everything is released in line, which tends to be unlikely, we could be setting up for a volatile morning, but only if the surprises is large.  Contrary to popular belief, ISM has beaten out non-farm payrolls to be the dollarâ�,��"�s most market moving release.  The main reason is because it sheds light on not only the labor market but also on the state of inflation.  Judging from the other data that have been released already such as the PCE deflator and the prices paid component of todayâ�,��"�s Chicago PMI report, which fell from 86.8 to 75.2, the ISM should paint a much tamer inflation picture.  As for the unemployment report, most signs are pointing to slower job growth in the month of August even though the market is forecasting for an increase of 125k jobs compared to 113k jobs in the month of July.  Decent jobless claims and an up tick in the employment component of the Chicago PMI survey suggest that we could see a triple digit number.  However, the softer ADP employment forecast and todayâ�,��"�s drop in help wanted ads puts the risk at a weaker instead of a stronger number. We think payrolls will likely come out in the range of 100-115k. The slowdown in the housing market should take a toll on construction related jobs while slower activity in manufacturing sector could make job growth in that part of the economy limited.  With the market questioning the sustainability of every good number and taking every weak number in stride, we would need to see a sharp divergence from the consensus forecast to cause dollar bulls or bears to alter their positions.  Most traders will already be in holiday mode and looking to square up ahead of the long weekend here in the US.  At this juncture, payrolls are not likely to have a meaningful impact on Fed policy.  The economy is slowing and inflationary pressures are moderating which will allow the Fed to continue to leave interest rates on hold. 

Euro
To the surprise of the market, there was not one negative word in ECB President Trichetâ�,��"�s comments today.  Not only did he reintroduce the word â�,��"vigilanceâ�,� but also tacked on the word â�,��"strong.â�,�  As a central bank that likes to control market expectations, the European Central bank is clearly telling us that the upside risks to growth and inflation is strong enough to warrant more monetary tightening over the next few months.  The ECB even raised their growth and inflation forecasts for this year and next.  This leaves a September rate hike on the table, although an October one is more likely.  There is also the possibility of another rate hike later in the year if the economic growth remains at its current pace.  The ECBâ�,��"�s strong stance in the face of falling energy prices should send a loud message to the currency market that they are not ready to back down, even though the US Federal Reserve may have.  Trichetâ�,��"�s comments were exceptionally positive for the Euro even though the single currency gave back most of its earlier gains.  The main reason why it reversed was because of the heightened tensions with Iran.  Today was the deadline for Iran to comply with the UNâ�,��"�s demand for them to suspend their nuclear activities or face sanctions.  Iran has said that they are not afraid of sanctions and added that their economy has done well in the face of previous sanctions.  President Bush has responded by saying that Iran must face consequences for their actions.  Overall, this equates to heightened geopolitical pressures which is benefiting the US dollar, a currency investors flee to in times of risk aversion.  Looking ahead, the divergent monetary policies and growth outlook between the ECB and the Fed will eventually favor the Euro over the US dollar. 

British Pound
Even though the housing market is recovering, the joy has yet to filter into consumer optimism.  According to the latest Gfk report, consumers were less confident in August than they were in July with the surveyâ�,��"�s index dropping from -4 to -8.  The surprise interest rate hike by the central bank earlier this month and the airline bomb plot have played a major role in the drop in confidence.  However with the sharp 0.8 percent rise in house prices according to the Nationwide Building society, it may only be a matter of time before consumers catch up.  Most of the economic data released over the past few weeks has indicated that the UK economy is improving.  The British pound erased gains against the US dollar, but rallied against the Euro.  It is also benefiting from merger and acquisition activity with US based Fluor Corp looking to make a bid for the British Nuclear Group.

Japanese Yen
According to recent data, the Japanese economy has been getting progressively worse.  Overnight, industrial production dropped by 0.9 percent against the marketâ�,��"�s forecast for 0.7 percent growth.  Housing starts also fell by a much larger 7.5 percent while construction orders dropped by 20 percent.  In the context of such large disappointments, it is hardly surprising that small businesses have actually turned pessimistic on the outlook for the Japanese economy.  The weaker economic data makes it even more unlikely for the Bank of Japan to raise interest rates anytime soon.  This means that in order for the Yen to reverse its recent slide, we would need to see either a sharp dollar sell-off or another revaluation announcement from China.

Kathy Lien is the Chief Currency Strategist at FXCM.