Asia Morning Forex Update

The USD was sidelined overnight as the BOE lifted rates unexpectedly, causing GBPUSD to surge to a high of 1.8915 from 1.8700.
Meanwhile ECB President Trichet was also viewed as hawkish by the market following the ECB's expected rate hike and EURUSD traded to 1.2835 from 1.2751.
USDJPY looks to have lost downward momentum and traded to a high of 115.31.

Fed expectations have not moved much in recent days, with the curve still pricing less than 40% odds of a hike next week but USD shorts may be growing increasingly wary of today's jobs report-with not much tightening priced in now, USD upside reaction to a strong report could be disproportionate to a USD weakness on a consensus or weaker result.

We assume payrolls will be below consensus at +125k.

Another theme to note, central bank reserve diversification remains in the headlines with reports this week indicating that the Bank of Italy in its half yearly report has shifted its holding of USD reserves down from 84% to 63% of its total EUR19 bln in currency reserves while raising its proportions of reserves in GBP to 24% and cutting its JPY holdings to 10% from 14%.

Today we have non-farm payrolls which comes out at 1230 GMT and the market expects a 142k increase.