US Dollar Weakens on Concerns for Weaker Payrolls on Friday (page 1 of 2)

US Dollar - Since the beginning of the week, we have seen very choppy price action in the currency market. The strong trend that manifested itself last week has gone into hiding ahead of the ECB rate decision and US non-farm payrolls report Thursday and Friday. Yesterday's Daily Fundamentals' headline was "USD/JPY - Not Out of the Woods" and even though the USD/JPY is lower today, the weakness is driven far less by the continuation of Yen strength than pure dollar weakness. The ADP Employment survey came in below expectations with only 57k new jobs added to corporate payrolls. This represents a drop from the 126k reading for the month of January and the 100k consensus forecast. Recognizing the recent inaccuracy of the ADP survey, the payroll agency revised the calculation methodology for the latest report. They increased the sample size by 220 percent and will be keeping records on a weekly instead of monthly basis. These changes are an attempt to make the ADP survey a more reliable indicator for non-farm payrolls, but only time will tell whether or not this will be true. The deterioration in the economy and the jump in jobless claims suggest that we could see weaker job growth in February, but the increase in the employment components of the manufacturing and service sector ISM report indicate that even if we do see deterioration, it could be limited. Supporting this notion is the increase in the Hudson Employment Index. Meanwhile the US dollar took another beating after the Beige Book report revealed a slight downgrade to the economic outlook. Although the various districts saw steady growth in retail sales and signs of stabilization in the housing market, there were other districts that saw some slowing in growth. Without anything of consequence on the US calendar tomorrow, trading should be dictated by the comments from the ECB President.

Euro - The Euro has strengthened significantly on the back broad dollar weakness. German factory orders fell short of expectations in the month of January, but Euro traders completely shrugged off the weakness as they look ahead to tomorrow's interest rate decision. The European Central Bank is widely expected to raise interest rates to 3.75 percent, but the market's focus will be on the accompanying press conference. Given the recent rise in the volatility in the markets and the global slide in equities, the ECB will mostly tone down their degree of hawkishness. Although they may not signal that there will definitely be further interest rate hikes, at the same time, they will not signal that the tightening cycle is over. Recent economic data indicates that the Value Added Tax increase may finally be hitting the economy, especially after Monday's exceptionally weak Eurozone retail sales report. The upside surprises that we saw in January now seem like a distant memory. Meanwhile the Swiss unemployment rate improved from 3.3 to 3.2 percent. This was right in line with expectations and confirms the Swiss National Bank's intentions to continue raising interest rates.

British Pound - The British Pound is slightly stronger against the US dollar and weaker against the Euro. After the increase in the BRC retail sales monitor on Tuesday, the Nationwide Building Society reported stronger consumer confidence for the month of February. This was a welcome surprise since the survey was calling for a drop in confidence. Like the European Central Bank, the Bank of England is scheduled to deliver a monetary policy announcement tomorrow. Despite the recent firmness in data, the central bank is not expected to lift interest rates.