US Dollar
The US dollar staged an even stronger rally today than it did yesterday as incoming economic data signals a potentially not so bad non-farm payrolls report tomorrow.  The employment component of the service sector ISM index expanded last month which signals that service sector companies have been increasing rather than decreasing jobs. The US economy is mostly service oriented, so we place greater weight on the service sector ISMââ,¬â"¢s employment component than the manufacturing sectorââ,¬â"¢s sub component.  Furthermore, the Challenger report also indicated that the planned layoffs in the month of December dropped by 29 percent compared to November, which represents a 49.3 percent drop when compared to a year ago.  Therefore even though the other leading indicators for payrolls such as the ADP report, the Hudson Employment index and this morningââ,¬â"¢s Monster.com index are signaling weaker payrolls on Friday, we may still see job growth rather than job loss.  The average jobless claims in the month of December were 314k, which was less than the 327k average in November and confirms that companies may not be firing aggressively enough to cause a drop in overall payrolls.  The EUR/USD is currently trading at a very critical level, indicating that tomorrowââ,¬â"¢s non-farm payrolls report could be a critical determinant of whether the currency pair is able to break below 1.30.  Job growth above 100k will probably be enough to take the currency pair below that level.  Payroll growth below 50k however, would put the soft landing scenario back in play.  Aside from ISM today, we also had factory orders and pending home sales.  Both were softer than expected and shrugged off by the market.  Instead, traders are playing closer attention todayââ,¬â"¢s $2 plus drop in oil prices.  Even though the Federal Reserve is currently worried about inflation, at the rate that oil prices are moving lower, it should not remain a problem for long and growth will soon become the central bankââ,¬â"¢s bigger concern should payrolls tomorrow be weak.

Euro
In the past two trading days, the EUR/USD has fallen over 200 pips which is nearly half of its November gains.  Economic data released this morning was slightly softer than expected but that should not be used to explain the weakness in the EURUSD since the softer data still reflects strength in the overall economy.  Eurozone service sector PMI data dropped from 57.6 to 57.2.  Unsurprisingly, France and Italy were the laggards while German service sector activity accelerated.  As the biggest economy within the Eurozone, Germany has performed very well in the face of a strong currency and an increase in the value added tax.  The inflation estimate also remains below the ECBââ,¬â"¢s target at 1.9 percent for the month of December.  We are still on track for another interest rate hike by the European Central Bank this quarter.  The OECD expects two more rate hikes from the central bank, but on a slightly more conservative schedule.  The groupââ,¬â"¢s Chief Economist is looking for one rate hike mid-year followed by another rate hike early next year.  The Eurozone is set to release retail PMI reports tomorrow along with Eurozone retail sales, confidence and producer prices. The PMI indices are expected to reflect decent spending while consumer confidence should mirror the recent strength of business confidence.  The problem though is that even if we get Euro bullish numbers, the Euro may delay its reaction until after the US payrolls report.   

British Pound
The British pound is trading at a one month low against the US dollar.  UK economic data was actually positive, but dollar strength prevented the pound from rallying.  Service sector PMI accelerated to the highest level in close to a decade, which highlights the overall strength of the UK economy.  However, consumers did not feel the same optimism.  Prospects of higher petrol and air travel taxes made hurt consumer confidence, which dropped from -7 to -8 in the month of December.  Money supply data held steady with the annualized pace slowing ever so slightly.  Housing data however remained relatively strong with mortgage approvals and net lending growing.  More housing reports are due for release tomorrow and they should continue to healthy.  The one sterling negative news today was the comments by BoE member Blanchflower who said that wage growth should remain subdued with slack in the labor market.  These dovish comments are characteristic of Blanchflower who voted against an interest rate hike in both August and November. 

Japanese Yen
The Japanese Yen was the star performer of the day as the currency rallied across the board in a wave of massive carry trade liquidation.  With Japanese traders back in the markets for the first time in close to a week, albeit for only half of a day, todayââ,¬â"¢s price auction may be a good reflection of the local bias.  No economic data was released overnight, but prospects for an interest rate later this month and the recent drop in oil prices has helped rally the currency.   Japan has a full day of trading on Friday, but there is little economic data due for release.  With the recent drop in commodity prices hurting the commodity currencies, carry trades in the pairs with a high interest rate spread such as the NZD/JPY and AUD/JPY could continue to suffer.

Commodity Currencies (CAD, AUD, NZD)
The commodity currencies were exceptionally weak today with the NZD/USD dropping by 1.27 percent or 100 pips to earn itself the title as being the dayââ,¬â"¢s biggest percentage mover.  The collapse in both the Australian and New Zealand dollars have been linked to carry trade liquidation along with the big drop in gold and oil prices.  Canada also had some weaker economic data with industrial product and raw material prices increasing less than expected last month.  The softness in the inflationary figures should not be surprising given the softness in commodity prices.  Traders were also worried about the Cabinet reshuffle and the possibility of a weak data forcing the Bank of Canada to consider lowering interest rates.  Canada is due to release their employment numbers along with their IVEY PMI report.  Given the recent weakness in the Canadian economy, both reports should show the recent slowdown in an economy which has seen impressive growth over the past 2 years.

Kathy Lien is the Chief Currency Strategist at FXCM.