Get ready for transatlantic fireworks today as EURUSD has nudged to new two-month highs ahead of huge event risks.

Nervous day Rare (unprecedented?) combination of ECB rate decision, US ISM Non-manufacturing number and US employment report all on same day.

MAJOR HEADLINES – PREVIOUS SESSION

• Australia Jun. AiG Performance of Service Industries out at 45.4 vs. 49.7 in May.
• Australia May Trade Balance out at -965M vs. -900M expected.
• Switzerland Jun. CPI out at 0.2% MoM vs. 0.3% expected.

THEMES TO WATCH – UPCOMING SESSION
Key Risk Events (All times in GMT)

• Sweden Riksbank Interest Rate Decision (0730)
• EuroZone Final Jun. PMI Services   (starting 0745)
• UK Jun. PMI Services (0830)
• Sweden Riksbank's Ingves to Speak (0900)
• Switzerland SNB to release Monetary Policy Report (0900)
• EuroZone ECB to announce interest rates (1145)
• EuroZone ECB's Trichet to hold press conference on interest rate decision (1230)
• US Weekly Initial Jobless Claims (1230)
• US Jun. Unemployment Rate and Change in Nonfarm Payrolls (1230)
• US Jun. ISM Non-manufacturing Survey (1400)

Market Comments
If ever a volatile day was virtually ensure by upcoming event risks, that today is today. Due to the July 4 US holiday tomorrow, the normal Friday employment report is being moved up to today, thus the reason for the bizarre combination of the ECB and US employment report on the same day. Regarding the US employment report: the last time around we pointed out that the employment report hadn't had a very impressive reaction function in terms of creating any sustainable move in the USD, but the May Unemployment rate notched a huge 0.5% gain to take the rate to 5.5% and the USD weakened sharply to close the week. Of course, this was a day after hawkish rhetoric from the ECB and EURUSD topped out already on the following Monday, when Bernanke and Paulson suddenly became strong USD buddies and then Bernanke waxed hawkish to take EURUSD to the bottom of the range already on Tuesday. This teaches us how quickly fortunes can change around these big events.

As we mentioned yesterday, we suspect that the US unemployment rate has less ability to surprise to the upside than last time around due to the calendar effects that caused the jump to be especially severe in May. Still, the rate may remain steady at 5.5% rather than dip to 5.4% as the market expects. The nonfarm payrolls number, on the other hand, could easily surprise to the downside, considering persistently elevated jobless claims numbers and the still high Challenger job cuts data (and, we are reluctant to include, the lousy ADP data). The ISM Non-manufacturing number is expected above 50, though we wonder how this is at all possible in this economy. Somehow, the manufacturing ISM came in above 50 the last time around, though this was mostly due to strong export demand.

Yesterday, EURUSD moved above the 1.5850 resistance area on the ADP number, and is thus poised at a crucial level ahead of today's big event risks. This is the fulcrum point where we either see an acceleration higher or a swoon back into the range.... Next resistance comes in at 1.6020, as the technical side of least resistance still appears higher unless Trichet can surprise to the dovish side for once...It is a bit hard to expect that: the ECB has virtually guaranteed a 25 bp hike today and a story from the German periodical Die Zeit reported Trichet talking about potentially "explosive" inflation problems. Still, we must of course watch the nuances of Trichet's forward guidance. He has stressed a bit that the ECB does not want to pre-commit and there are increasing signs of division within the ECB. So even if Trichet is hawkish - for example, if he conjures up scenarios (fall in oil prices, weaker than expected growth, poor visibility, etc...) that would allow the ECB to have a dovish "out" somewhere down the road, this might be the only way for him to appear a bit more dovish than what the market is looking for.

In equity news, the press announced the official start of a "true" bear market as the US Dow Jones Industrial Average has fallen the requisite 20% to attain that definition. The MSCI global indexes are also in bear market territory now. Yet JPY crosses are still bid in many places with the focus on commodity inflation and higher interest rates. If we ever get the classic run for cover response across markets (big bond rally and equity sell-off) we will see monstrous falls in the safe haven crosses. The volatility potential is highly asymmetric. Could USDJPY be the bigger mover today than EURUSD?

In one of the more comic news stories we've come across, the credit and bond rating agency Moody's is blaming a computing "coding bug" on the reason some CDO's were given AAA ratings. Ah, there you have it, when your management is under fire, blame the programmers. On a more serious note, there are continued signs of rising stress levels in credit markets on continued troubles with the bond insurers and rising credit spreads. It feels like general risk aversion in the market can only get worse. The huge question for currencies and perhaps all markets remains: when will the oil rally break? It seems we may have a chicken and egg problem with oil and the USD and it seems a break in the oil price is needed for the JPY to see sustained strength. Looking at general trajectory of the numbers coming out of Australia lately, we also have an eye on AUDJPY, which could have 1000 pips of rapid downside one of these days when this crazy market regime finally comes screeching to a halt...

GBP is looking very weak vs. EUR and CHF this morning. The flurry of news out of the UK seems to show things getting worse by the day. Despite the bizarrely strong Retail Sales number the last time around, some of the UK's biggest retailers have reported terrible results, including news yesterday that same store sales at Marks and Spencer dropped a nasty 5.3% in Q2. As well, large UK home builder Taylor and Wimpey announced that it was having trouble finding funding to shore up its balance sheet and the construction PMI for June came out at a disastrous 38.1. It appears the real estate market there is entering a freefall. EURGBP broke resistance and could be headed back above 0.8000 now.