Morning Forex Overview

Previous session overview
On Thursday, the dollar rallied impressively after the head of the European Central Bank proved more cautious about future rate hikes than many investors had expected.

With U.S. financial markets closed Friday for Independence Day, the greenback ended the shortened New York session up significantly against the euro, yen and most other widely traded rivals, after the labor data.

The ECB chief said he would decline to pre-commit to any future rate moves, adding that while inflation remains a worry, there are downside risks to economic growth.

On Thursday, EURUSD couldn't confirm the break higher it made on Wednesday and returned inside its sideways trading range of 1.5786 to 1.5842. While the ECB did raise rates, as expected, president Trichet wasn't as hawkish as many expected. After remarks from ECB president Trichet on euro zone interest rates, dollar rallied to 1.5682 against the euro.

The British pound extended its losses as bad news continues to pour out of the UK. Service sector PMI fell to the lowest level since October 2001. This is the first time in 7 years that there has been a contraction in service, manufacturing and construction sector PMI.

The Japanese yen has also fallen victim to the US dollar's rebound ahead of the holiday weekend. The yen has dropped nearly 1% on  economic news out of the US.

The Canadian dollar weakened. Dragging it down was the one two punch of the decision by the European Central Bank to hike its key interest rate, which weighed on the Canadian dollar since the Bank of Canada only recently took a break from an aggressive easing campaign and is not expected to start hiking anytime soon.

The Australian dollar hugged a narrow range in Asia Friday, largely ignoring a strong rally by the U.S. dollar overnight. Ahead of the U.S. Independence Day holiday, volumes were thin.

Market expectation
The euro is slightly higher Friday, but technicians look for a pullback against the dollar.

Traders don't buy the yen for the yen's sake but just when risks rise and they want to unwind some positions. No near term prospects of a rate hike by the BOJ and weak Japanese stocks mean that yen's gains are likely limited.

GBPUSD is currently testing support at 1.98, and on a break the next key prop comes in at 1.9780.

On Friday, economic data releases include Japan leading indicator, German factory orders and Canada Ivey PMI. The U.S. market will be closed in observance of the U.S. Independence Day holiday. With the US on holiday, it should be a quieter end to the week.