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EUR/USD reference rates at publication:Spot: 1.2112Bank transfers (indicative guide): 1.1687-1.1770Money transfer specialist rates (indicative): 1.2000-1.2026More information on securing specialist rates, hereSet up an exchange rate alert, hereThe Dollar holds gains ahead of the Friday release of U.S. jobs data which is likely to be the most important economic reading of some time, with analysts warning that disappointment could lead to a sizeable retreat by the U.S. currency.

The data is due for release at 13:30 and the market is looking for a reading of 650K for May, a substantive improvement on the 266K reported last month.

The May report follows on from the surprisingly softer April data, making today's non-farm payrolls release one of the most important releases in some time.

Back in April the Dollar fell sharply as markets had clearly underestimated the weakness in the numbers, serving notice that jobs data matters for foreign exchange markets once again.

Ahead of the Friday jobs report the Euro-to-Dollar exchange rate (EUR/USD) eased to fresh 3-week low at 1.2114 before finding buyers to offer some support.

"It has steadied around 1.2125, as market awaits key US non-farm payrolls," says John Noonan, a Reuters market analyst, "If strong US jobs pushes US yields higher, the EUR/USD will be vulnerable."

Noonan observes there is a lack of strong support in the market ahead of 1.2040/55.

Above: EUR/USD daily chart.

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Strategists at Citi say they asymmetric risks for the Dollar, with a larger reaction likely on a weaker-than-expected outcome.

This response is likely because the market appears to already be expecting a strong reading.

The Dollar rose sharply against its major peers on Thursday in the wake of other labour market data that showed the U.S. employment situation continues to improve.

Weekly Initial Jobless Claims came in at 385K, which is below the 390K analysts had forecast.

The ADP Nonfarm Employment reading for May meanwhile came in at 978K, ahead of the 650K market was expecting and making a substantive improvement on the April reading of 654K.

The strong reaction by the market that saw Dollars bought against all major currencies could mean investors have already 'priced in' a strong outcome from the Friday data, which suggests a potentially muted reaction by the Dollar on a strong reading.

Above: U.S. jobless claims are falling, image courtesy of Pantheon Macroeconomics

In short, it would probably take an unquestionably strong reading to trigger another sharp rally in the Dollar.

The U.S. Federal Reserve now operates a policy of supporting the labour market as well as managing inflation, meaning they will only consider raising interest rates should the labour market look to be on the mend.

The incoming labour market data is telling us that the Fed's concerns for jobs might soon start easing and their guidance can become more 'hawkish' as a result.

Various Fed officials have put out the line that they are starting to "talk about talking" about reducing quantitative easing, a move colloquially referred to as 'tapering'.

Tapering is a prerequisite to an eventual rate hike, which markets see taking place in 2022.

Tapering and higher interest rates are typically assessed by foreign exchange analysts to be supportive of the Dollar.

Citi say EUR/USD, USD/JPY and USD/CNH "are some of the pairs that are trading at very interesting levels" ahead of the payrolls report.

"They believe that there are asymmetric risks to the non-farm payrolls print. Though FX will likely be volatile either way, we believe that a larger reaction will be seen in the event of a miss, rather than a beat given the latest build-up in USD longs," says Rui Ding at Citi.

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"However, we think that JPY losses in the event of a large beat will likely match EUR losses, as a very large number could potentially also elicit a risk-off reaction in markets," says Ding.

Citi technical analyst Tom Fitzpatrick has meanwhile observed several cross-asset charts and flags that markets appear to lie at decisive crossroads.

He notes there are some signs of potential U.S. Dollar strength in the works, a picture that is still supported by the real yield chart.

Should the Euro sell off against the Dollar, Fitzpatrick finds the next good support for EUR/USD can be found at 1.2052.

More substantive support stands in the 1.1976-1.2003 range.