Dollar Weakness Limited as Incoming Data Suggests Strong Payrolls (page 1 of 2)

FXCM - DailyFX Fundamentals 04-04-07

US Dollar

The service sector ISM index dropped to a four year low in the month of March while factory orders grew by a weaker than expected 1 percent in the month of February. These reports indicate that the US economy is not out of the woods, but at the same time, these disappointments were not enough to trigger a major reversal in the US dollar. Instead, the sharp drop in layoffs reported by Challenger Gray and Christmas and the rise in employment reported by payroll agency ADP has everyone focusing their attention on Friday's non-farm payrolls release. According to Challenger, layoffs fell by 24.6 percent in the month of March. The last time layoffs dropped by this much was in November, December of 2006 and January of 2007. In those 3 months, on average, we saw monthly job growth of 189k. We already have a NFP Preview up on DailyFX and encourage you read more about what we expect. The four week moving average of jobless claims for the month of March was 315k, compared to 338k in February. The last time the average in claims were this lean was back in December 2006 and January 2007, when US companies added 226k and 146k jobs to their payrolls respectively. The improvement from February to March also tells us that at bare minimum, job growth in March should be stronger than the previous month. Frigid temperatures in February caused many construction sector projects to be halted. The temperate weather in March should have encouraged the resumption of many of these projects. A deeper look at the ISM number reveals a sharp rise in prices paid, validating the Federal Reserve's concerns about inflation. The rise in inflation was primarily driven by the rebound in oil prices, but this could end now that prices are beginning to fall as geopolitical tensions subside. This morning, Iran released the 15 British naval personnel that they captured. With another war in the Middle East averted, the release has extended the drop in crude prices. Looking ahead, the US economic calendar continues to be very light with only jobless claims and the Monster.com Employment Index on the calendar. This should keep the price action in the currencies reflective of the market's expectations for payrolls.

Euro

The Euro managed to erase all of yesterday's losses thanks to combination of stronger Eurozone data and weaker US data. In contrast to the service sector in the US, the service sector in the Eurozone actually saw faster growth in the month of March. Accelerated activity in France and Germany offset a mild decrease in Italian service sector activity. Germany also reported a sharp rise in factory orders due to some unusual demand for big ticket items. The only disappointment was in Eurozone retail sales, which fell victim to weaker spending. Overall, the impact of the Value Added Tax on Germany and the Eurozone as a whole continues to be limited. This keeps a rate hike by the European Central Bank in play as ECB members continue to remain hawkish. Garganas suggested this morning that the central bank could raise its growth forecast while Liebscher warned that price risks are absolutely to the upside. German industrial production is the only Eurozone release expected tomorrow. The stronger factory orders number could drive a better than expected IP number tomorrow. Meanwhile, the release of the UK naval crew has sent the Swiss franc tumbling against the Euro. EUR/CHF is now trading at a fresh 7 year high.

British Pound

Interestingly enough, we did not see much strength in the British pound today despite the release of the UK naval crew.