UK jobless claims rose by 73.7K versus estimates of 118K, printing at nearly half the level of the month’s prior reading of 138.4K while the unemployment rate matched expectations reaching 6.7% - its highest level since 1997.

The rally in U.S. equities and the improvement in risk appetite drove the U.S. dollar lower against all higher yielding currencies. Thanks to some extra efforts by the G20 and relaxation of mark to market accounting by the Financial Accounting Standards Board (FASB), investors have become more optimistic. However a big event risk lies ahead for the U.S. dollar and it remains to be seen whether the positive sentiment following the G20 and FASB can be sustained. The non-farm payrolls report is traditionally one of the most market moving pieces of data for the foreign exchange market and with the strong possibility of another sharp decline in jobs, it is too early to completely buy into the recovery story (How Could the Dollar React to Non-Farm Payrolls?).

A bullish butterfly pattern has nearly completed on the EUR/CHF.

EUR/USD rallied today in Asian and early European trade on short covering as failure to break the psychologically key 1.2500 level over the past several days prompted a buying spree despite the fact that economic data from the region continued to paint a bleak picture. On the economic front German trade balance printed at 8.3 Billion euro surplus - less than the 10.0 Billion number that the market was expecting - while French data showed a deficit of -4.5 Billion against forecasts of -3.0 Billion.

The euro tumbled at the start of trade this week after the Eurozone summit on Sunday failed to produce any coordinated response to the growing financial crisis in Eastern Europe. Instead, EU officials led by German Chancellor Angela Merkel opted for out for “case by case” country solution, refusing to provide any specific details at the present time.

Pound liquidation continued unabated for the second day in a row , as traders absorbed the details of the UK rescue plan and grappled with the massive losses posted by RBS. Many of the market participants are coming to a creeping realization that the UK banking sector may have to be nationalized as a result of the recent events.

With Japanese markets closed for Emperors birthday, currencies spent the night in quiet pre-holiday trade essentially marking time until dealing desks close tomorrow evening for the Christmas holiday. The euro made another run at the 1.4000 level boosted by better than expected French consumer spending and Current Account data, but the rally fizzled into the early European session as traders continued to square up their books.

Evidence of oncoming holidays was all around the currency market tonight, as trading slowed to a crawl and the economic calendar was essentially barren of any significant data. Nevertheless, the euro managed to stage a rebound rally pushing above 1.4000 once again as better risk appetite in Asian markets and the oversold conditions in the unit created a perfect set up for a short covering bounce.