US Dollar
Since the beginning of the week, we have seen very choppy price action in the currency market. The strong trend that manifested itself last week has gone into hiding ahead of the ECB rate decision and US non-farm payrolls report Thursday and Friday. Yesterday’s Daily Fundamentals’ headline was “USD/JPY – Not Out of the Woods” and even though the USD/JPY is lower today, the weakness is driven far less by the continuation of Yen strength than pure dollar weakness. The ADP Employment survey came in below expectations with only 57k new jobs added to corporate payrolls. This represents a drop from the 126k reading for the month of January and the 100k consensus forecast. Recognizing the recent inaccuracy of the ADP survey, the payroll agency revised the calculation methodology for the latest report. They increased the sample size by 220 percent and will be keeping records on a weekly instead of monthly basis. These changes are an attempt to make the ADP survey a more reliable indicator for non-farm payrolls, but only time will tell whether or not this will be true. The deterioration in the economy and the jump in jobless claims suggest that we could see weaker job growth in February, but the increase in the employment components of the manufacturing and service sector ISM report indicate that even if we do see deterioration, it could be limited. Supporting this notion is the increase in the Hudson Employment Index. Meanwhile the US dollar took another beating after the Beige Book report revealed a slight downgrade to the economic outlook. Although the various districts saw steady growth in retail sales and signs of stabilization in the housing market, there were other districts that saw some slowing in growth. Without anything of consequence on the US calendar tomorrow, trading should be dictated by the comments from the ECB President.

Euro
The Euro has strengthened significantly on the back broad dollar weakness. German factory orders fell short of expectations in the month of January, but Euro traders completely shrugged off the weakness as they look ahead to tomorrow’s interest rate decision. The European Central Bank is widely expected to raise interest rates to 3.75 percent, but the market’s focus will be on the accompanying press conference. Given the recent rise in the volatility in the markets and the global slide in equities, the ECB will mostly tone down their degree of hawkishness. Although they may not signal that there will definitely be further interest rate hikes, at the same time, they will not signal that the tightening cycle is over. Recent economic data indicates that the Value Added Tax increase may finally be hitting the economy, especially after Monday’s exceptionally weak Eurozone retail sales report. The upside surprises that we saw in January now seem like a distant memory. Meanwhile the Swiss unemployment rate improved from 3.3 to 3.2 percent. This was right in line with expectations and confirms the Swiss National Bank’s intentions to continue raising interest rates.

British Pound
The British Pound is slightly stronger against the US dollar and weaker against the Euro. After the increase in the BRC retail sales monitor on Tuesday, the Nationwide Building Society reported stronger consumer confidence for the month of February. This was a welcome surprise since the survey was calling for a drop in confidence. Like the European Central Bank, the Bank of England is scheduled to deliver a monetary policy announcement tomorrow. Despite the recent firmness in data, the central bank is not expected to lift interest rates. Although most BoE members are optimistic about growth, their views on inflation have been very mixed. Blanchflower thinks that inflation will remain low and fall below their target while Sentence expects the exact opposite. According to the BRC, shop prices eased in the month of February, which supports Blanchflower’s case for the time being.

Japanese Yen
The Japanese Yen crosses have struggled to extend their rebound after yesterday’s impressive rally. Having opened higher in the Asian and European session, most of the Yen crosses with the exception of CHF/JPY have fallen back into the red. On an otherwise quiet trading day, the Japanese Yen continued to drive market activity. Take the Canadian dollar for example. A drop in oil inventories, a slew of stronger Canadian data and a rise in oil prices have failed to rally the currency. Any attempt to rebound was erased by the selling of the Canadian dollar against the Japanese Yen. The same was seen in the New Zealand dollar, which turned lower despite a rate hike and hawkish comments from the central bank. The Bank of Japan is still not stepping in to stem the currency’s rise, which is providing a green light for traders to continue to buy the Yen. To find out whether we think the carry trade liquidation is over, read our Special Report.

Commodity Currencies (CAD, AUD, NZD)
The Canadian and New Zealand dollars fell victim to Yen strength, leaving the Australian dollar as the only commodity currency that did not see its weakness against the Yen filter into weakness against the dollar. Although there was no Canadian data release, oil inventories dropped, sending crude prices up over $1 to $61.79. Canada has enjoyed stronger data over the past few days which should have been positive for the Loonie. The same was true in New Zealand. Not only did the Reserve Bank raise interest rates from 7.25 to 7.50 percent, they also signaled that more rate hikes will probably be needed. They felt that inflation risks were considerable thanks to a reacceleration in the housing market and strong overall growth. Bear in mind, New Zealand is one of the few central banks still considering raising rates. Meanwhile Australia also reported stronger data last night even though the Reserve Bank of Australia left interest rates unchanged. Fourth quarter GDP jumped by 1.0 percent on a quarterly basis and 2.8 percent on an annualized basis. The quarterly improvement was double expectations. There is no further Australian data tonight, but New Zealand will be reporting its Q4 terms of trade and Canada will be releasing its housing starts and new housing price reports.

Kathy Lien is the Chief Currency Strategist at FXCM.