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Data was released indicating that applications for jobless benefits increased 10,000 to 372,000 in the week ended Dec. 29, the Labor Department reported today in Washington. The Euro (NYSEARCA:FXE) was down on this news. It comes ahead of tomorrow's Non-Farm Payroll release, notably the most significant economic data release in currency markets (not including central bank or interest rate announcements).

The Euro and Yen (NYSEARCA:FXY) traded off their highs. The Yen has been on a downward spiral since a new government in Japan announced plans to strategically debase the currency.

Japanese Yen

USD/JPY in particular has been on a tear, going from September lows of 77 to recent highs of 87.34. This is a 13% increase in that pair alone, very significant considering it happened in a few months, but the majority of it in the last 2 weeks. The volatility on the USD/JPY has been extremely low in 2012, so this is a breakout of not only the price range but also the volatility range. It's all based on the fundamentals, that the new government in Japan will pursue an aggressive money printing policy. For now at least, the pair seems to have stalled. Could this be a short term top, indicating a reversal? We think so. But given the government's position, betting on any Yen increase in this climate is risky.

(click to enlarge daily USD/JPY chart)

Yen trade

If you did want to bet on a top here, simply buy the Japanese Yen in your stock account or if you have a Forex account short USD/JPY. The dollar is the best Currency to trade against the Yen for this purpose because the USD is also pursuing a monetary expansion policy, which is why the rise in USD/JPY is strange. The USD has been down against most Currencies most notably the Euro.

The Euro

The Euro is a bit more complicated, as the rise in EUR/USD has baffled many traders. The crisis in Europe has deepened and fundamental factors do not explain a EUR/USD rate of 1.33. Currently the EUR/USD is trading at 1.3110, and some traders are saying that it's reached its top at least in the short term.

(click to enlarge EUR/USD daily)

The Euro is sitting on its daily trendline support - while this is a fundamental play, Forex traders do watch technical levels. 1.31 is a key psychological support. Tomorrow's Non-Farm Payroll release can decide the fate of the USD/JPY rally and the stall in rise of EUR/USD.

Non-Farm Payrolls

The unemployment rate is expected to stay at 7.7% but any surprise can cause the USD to rapidly rise or fall. In the case of EUR/USD a positive NFP number might cause EUR/USD to break its support, triggering stops and creating momentum, exacerbating the move down. A negative number would reinforce Euro bulls, and EUR/USD would then likely continue it's trend up. If the number is as expected we can expect low volatility and potential range establishment for the short term.

The same is true for USD/JPY but as pairs are quoted it would be the opposite; a positive number would cause USD/JPY to continue its trend, and a negative number could give USD/JPY some reprieve and possibly start a trend reversal.

The fiscal cliff is "solved" or at least that's the market perception. The agreement reached technically lasts only 90 days but the market perception is that the cliff was avoided, and so NFP tomorrow will be the next significant market data point to watch, especially for Forex.

(Forex Risk Disclosure - Click here to read)

The risk of loss in trading foreign exchange markets (FOREX), also known as cash foreign currencies, or the FOREX markets, can be substantial.

Source: Currency Markets Mixed Ahead Of NFP