There was light relief for both British and Eurozone service sectors as coinciding Markit Purchasing Managers Index data showed rebounds for those sectors in both nations. These diffusion indices draw a line in the sand at 50 to indicate expansion and contraction with a reading above 50 representing growth while lower levels represent contraction. The U.K. services PMI improved from 43.2 to 45.5 in February, while the Eurozone reading rallied from a record low to 40.9. Although welcome data, one has to point out that these economies continue to contract but at a slightly lesser pace.

The Eurozone PMI was accompanied by more optimism over future activity where respondents looked forward to a resumption of activity ahead. For now though work and order backlogs continue to decline in a sign that current conditions continue to deteriorate allowing companies to work on overdue projects.

While the broad picture appears to be improving, it is still extremely important to point out that the likelihood of a sustained near-term recovery is slim. Two pieces of evidence this morning augur worse to come. First, the Swiss government released the weakest consumer price reading in 50 years, in which prices declined 0.4% from one year ago. Blaming declining oil and energy prices, rent and transport costs fell delivering an anemic annual rate of consumer inflation of 0.2%. The Swiss National Bank has predicted that for 2009 prices will range between -0.55 and zero against the backdrop of a 2.2% contraction in gross domestic product.

In Spain, where unemployment is the Eurozone’s highest, the Bank of Spain predicted that unemployment this year would reach 17.9% and that the employment picture would weaken to 19.4% by 2010. For the longest time the Spaniards have breached EU deficit limits, which are set to 3% of GDP, while today the Bank predicted a worsening picture with the 2009 rising to 8.3% and growing to 8.7% next year. For this year the Bank predicts economic contraction of 3%, which improves to a contraction of 1.1% for 2010.

This remains a very ugly picture despite today’s PMI data, which is one reason that the euro was a little weaker at $1.3440 ahead of today’s U.S. non-farm payroll report. In the event job losses came in at 663,000, bang in line with consensus driving the unemployment rate to 8.5%. In this climate, investors are accordingly treating in-line as a cue to buy euros in the hope that the ECB won’t need to react with quantitative easing.

However, investors appear to be taking a more somber view of the U.S. labor data. While investors have been accustomed to bad news, today’s in-line report still masks a nasty domestic situation. Some 43,000 financial sector workers lost their jobs in March despite the easing of credit conditions. Some 47,800 retail employees were terminated from positions as consumers remained cautious. 17,500 auto-related workers lost their jobs as demand for new cars and trucks remains in purgatory awaiting the potential for bankruptcy proceedings at General Motors. Analysts predict that in this event some 1 million job losses would be recorded sending the rate of unemployment to 11% and above. And despite apparent glimmers of hope within the housing sector last month, including a rise in new home sales, some 126,000 construction workers lost their jobs at a time when better weather traditionally sparks hiring. Given that we know unemployment and foreclosures are prolonging open season on housing inventories, it remains difficult for us to say that today’s in-line report should produce greater risk appetite.

The Japanese yen continues to lose focus and overnight the dollar breached the ¥100 mark and indeed, post-unemployment, the dollar continues to advance to ¥100.20. The blind acceptance that the economy is on the mend continues to detract from the traditional safe haven status of the Japanese unit.

Within one-hour of the release of payroll data Friday, the dollar has strengthened to $1.3375 against the euro, while against the yen it’s trading at ¥99.90 and against the pound it’s trading at $1.4786.