The dollar fell sharply following this morning's ADP private sector payrolls report, dropping to a fresh 10-week low versus the euro at 1.5885 and beneath the 106-level versus the yen. The June ADP private-sector payrolls declined by more than expected, posting a loss of 79k jobs, far steeper than the forecasted loss of 20k jobs from 40k jobs created in May. The disappointing jobs data bodes poorly for tomorrow's June labor report, with consensus estimates for non-farm payrolls calling for a loss of 60k jobs while the unemployment rate is forecasted to improve to 5.4% from 5.5%.

In addition to the ADP report, data releases on Wednesday also included May durable goods orders and factory orders. The revised May durable goods orders were in line with expectations and unchanged from the preliminary reading, while the excluding transportations figure improved marginally, posting a marginal improvement to -0.8% from -0.9%. May factory orders were slightly better than expected at 0.6%, beating calls for a larger decline to 0.4% from 1.1% previously.

Euro Firms to 10-week High

The euro rallied to its highest level since late April at 1.5888 on the heels of the weaker than forecast ADP payrolls data. Eurozone economic reports saw higher than expected producer prices, with the May PPI rising to 1.2%, outpacing calls for an increase to 0.9% from 0.8% in the previous month, while jumping to 7.1% and up sharply from a year earlier at 6.1%. The uptick in prices for the Eurozone raises prospects for additional policy tightening beyond tomorrow's meeting, ultimately benefiting the euro.

Consensus forecasts are expecting a 25-basis point increase to 4.25%. Given the steep increases in food and energy prices, inflation in the Eurozone has reached its highest level in 11-years, rising at 4% a year. Recall that in the previous post-meeting press conference, ECB President Trichet suggested that the Bank will likely hike rates at the July meeting. Given the ECB's mandate to maintain price stability and keeping inflation rates of below, but close to 2% over the medium term, with recent data revealing prices increasing at a record pace, markets will pay close attention to comments from Trichet to gauge both the likelihood and scope for any further monetary policy tightening over the remainder of the year. Any hints that additional ‘vigilance' over inflation is necessary will likely fuel expectations for more rate hikes to come, triggering fresh demand for the single currency.