US Dollar
Now more than ever, the non-farm payrolls report has the potential to trigger sharp movements in the currency market. For the past week, the dollar has consolidated its losses against the Japanese Yen, its gains against the Euro, British pound and commodity currencies. During this time, many traders have been sitting on the sidelines as they wait for the next big market catalyst. Non-farm payrolls have the potential to be that catalyst, especially since the release is typically one of the most market moving. The estimates of the 80 economists surveyed by Bloomberg range from 38k to 165k with a median of 95k and an average of 98k. Such a wide range of forecasts indicate that even the experts don’t really have a clue. The rally in the US dollar today suggests that the market is not giving much weight to the disappointing ADP employment survey. Despite the recent changes to the calculation methodology and the sharp rise in jobless claims during the month of February, the weakness of those reports have been countered by the strength in the employment indexes of the service and manufacturing sector ISM surveys, the Hudson Employment index and the Monster.com Employment Index. Yesterday’s Beige Book report also indicated that the labor market remained tight in a number of the Fed districts. The current consensus forecast is for 95k new jobs to be added to US payrolls. The CME derivatives auction settled at 82.5k, which suggests that traders are more pessimistic about payroll growth than economists. With Fed Fund futures pricing in a 25bp rate cut by August, the market is already jittery about economic weakness. If companies added less than 75k jobs to payrolls, the dollar could really be in trouble. On the hand, if job growth is anywhere above the prior month’s 111k reading, expect the current dollar strength to continue. In addition to headline release, it is extremely important to look for revisions. A sharp revision to the January number could offset any strength or weakness in the February figure.

Euro
The European Central Bank raised interest rates by 25bp today to 3.75 percent. This was in line with expectations and did not result in a lasting reaction in the EUR/USD. What moved the Euro instead were the comments from ECB President Trichet who toned down his degree of hawkishness. Trichet indicated that interest rates are currently “moderate” rather than “low” and confirmed that the word vigilance was not used in his prepared statement. The shift in tone is likely in response to the recent volatility in the global equity markets as well as their outlook for softer inflation in the spring and summer. Like most of the central bankers around the world, Trichet does not want to cause any more undue volatility in the markets which is why he is loosening up on the ECB's tightening stance in the hopes that the equity markets will stabilize. Although the market has perceived his comments to be Euro bearish, the extent of the bearishness was limited as the central bank leaves the door open for further interest rate hikes in the second half of the year. They revised up their growth forecasts and indicated that inflation will most likely pick up after the summer. The key takeaway message is that the ECB will not be raising rates in April and most likely not in May either. Beyond that, it will depend on how global growth fares. The only piece of meaningful Eurozone data released this morning was industrial production, which came out much stronger than expected. Swiss consumer prices fell short of expectations, rising by only 0.2 percent month over month. The disappointment however should not stop the central bank from raising interest rates.

British Pound
Stronger house prices has helped to rally the British pound against the Euro and Japanese Yen as it represents stability in the housing market. The Bank of England left interest rate unchanged at 5.25 percent which was right in line with expectations. When the central bank does not make changes to monetary policy, they do not release a statement. This means that traders will have to wait until March 21 when the minutes are released to get a sense of which way the central bank leans. The recent strength in UK data suggests that the BoE may resume raising interest rates later this year. The timing of any moves however will be dependent upon the pace of inflation growth. The British pound was unable to hold onto its strength against the US dollar. Looking ahead, January industrial production is due for release tomorrow. A rebound is expected after a drop in manufacturing activity last December.

Japanese Yen
Traders need a heavy heart to trade the Japanese Yen as the currency pair has become prone to sharp intraday reversals. At the end of the US trading session, USD/JPY sold off from 116.25 to 115.56 in a matter of hours. When Asia traders came in around 19:00 EST, they began buying the currency pair. Over the next 15 hours, USDJPY rallied close to 200 pips with barely any retracement. There was no significant data released overnight. Nikkei news reported sharp increases in full time hiring last year with more plans for hiring from large corporations such as Sony, Sharp and Sumitomo Mitsui Banking over the next year. Machinery orders are the only piece of data on the docket tonight which means that the fate of the Yen will most likely be determined by US payrolls tomorrow.

Commodity Currencies (CAD, AUD, NZD)
We had mixed price action in the commodity currencies today with the New Zealand dollar rising strongly, the Canadian dollar sliding and the Australian dollar ending the day virtually unchanged. The New Zealand dollar is benefitting from the hawkish comments from RBNZ Governor Bollard last night who signaled that further rate hikes will most likely be needed. Canada reported mixed data with weaker housing starts offset by stronger growth in house prices. Canadian employment figures and international trade are due for release tomorrow. After a sharp increase in employment in January, companies are expected to slow their hiring. Despite the weakness of the Canadian dollar, the trade surplus is expected to deteriorate slightly. There is no data releases scheduled for Australia and New Zealand.

Kathy Lien is the Chief Currency Strategist at FXCM.