A weak payroll figure would reinforce negative dollar sentiment, but the overall risks suggest that the Euro offers little immediate value at current levels.

The dollar was unable to sustain gains through 1.2750 ahead of the ECB interest rate decision on Thursday and was trapped in narrow ranges around 1.2770 for much of the US session. The dollar was marginally weaker in early Europe on Friday, although there was little movement ahead of the US payroll report.

As expected, the ECB left interest rates unchanged at 3.25% following the latest council meting. At the press conference, the bank stated that policy was still accommodative and that strong vigilance was required on inflation. The remarks overall clearly pointed to an interest rate increase in December, especially as ECB Chairman Trichet stated that he did not want to adjust market expectations. There were no clear hints over 2007 policy and the ECB will want to maintain as much flexibility as possible, but the overall tone of the remarks suggest that the bank is expecting to increase rates further.

The third-quarter data recorded no change in US productivity and there was an annual increase of 5.3% in unit labour costs which was the highest figure for over 20 years.

The inflation data will remind investors that the Federal Reserve can not afford to be complacent over the threat of rising wage costs and will curb expectations of lower interest rates. The Friday payroll report will be important for interest rate expectations and the dollar. A very weak figure would tend to damage the US currency even if wage concerns persist while a figure above 150,000 would offer some near-term dollar relief.