Dollar Rallies on Stronger Data and Drop in Oil (page 1 of 2)

US Dollar - The US dollar staged an even stronger rally today than it did yesterday as incoming economic data signals a potentially not so bad non-farm payrolls report tomorrow. The employment component of the service sector ISM index expanded last month which signals that service sector companies have been increasing rather than decreasing jobs. The US economy is mostly service oriented, so we place greater weight on the service sector ISM's employment component than the manufacturing sector's sub component. Furthermore, the Challenger report also indicated that the planned layoffs in the month of December dropped by 29 percent compared to November, which represents a 49.3 percent drop when compared to a year ago. Therefore even though the other leading indicators for payrolls such as the ADP report, the Hudson Employment index and this morning's Monster.com index are signaling weaker payrolls on Friday, we may still see job growth rather than job loss. The average jobless claims in the month of December were 314k, which was less than the 327k average in November and confirms that companies may not be firing aggressively enough to cause a drop in overall payrolls. The EUR/USD is currently trading at a very critical level, indicating that tomorrow's non-farm payrolls report could be a critical determinant of whether the currency pair is able to break below 1.30. Job growth above 100k will probably be enough to take the currency pair below that level. Payroll growth below 50k however, would put the soft landing scenario back in play. Aside from ISM today, we also had factory orders and pending home sales. Both were softer than expected and shrugged off by the market. Instead, traders are playing closer attention today's $2 plus drop in oil prices. Even though the Federal Reserve is currently worried about inflation, at the rate that oil prices are moving lower, it should not remain a problem for long and growth will soon become the central bank's bigger concern should payrolls tomorrow be weak.

Euro - In the past two trading days, the EUR/USD has fallen over 200 pips which is nearly half of its November gains. Economic data released this morning was slightly softer than expected but that should not be used to explain the weakness in the EURUSD since the softer data still reflects strength in the overall economy. Eurozone service sector PMI data dropped from 57.6 to 57.2. Unsurprisingly, France and Italy were the laggards while German service sector activity accelerated. As the biggest economy within the Eurozone, Germany has performed very well in the face of a strong currency and an increase in the value added tax. The inflation estimate also remains below the ECB's target at 1.9 percent for the month of December. We are still on track for another interest rate hike by the European Central Bank this quarter. The OECD expects two more rate hikes from the central bank, but on a slightly more conservative schedule. The group's Chief Economist is looking for one rate hike mid-year followed by another rate hike early next year. The Eurozone is set to release retail PMI reports tomorrow along with Eurozone retail sales, confidence and producer prices. The PMI indices are expected to reflect decent spending while consumer confidence should mirror the recent strength of business confidence. The problem though is that even if we get Euro bullish numbers, the Euro may delay its reaction until after the US payrolls report.

British Pound - The British pound is trading at a one month low against the US dollar.