Strong US Job Growth Delays Any Chance of a Fed Rate Cut (page 1 of 2)

FXCM DailyFX Fundamentals 04-06-07

By Kathy Lien, Chief

US Dollar - The "leading indicators" for non-farm payrolls correctly forecasted exceptionally strong job growth in the month of March and the dollar has skyrocketed in response. In our non-farm payrolls preview, we had said that "all the market needs now is a strong payrolls number to indicate that economic growth is chugging along," and now, they have it. US companies added 180k jobs to their payrolls last month, which was 50k more than the market was expecting while jobs created in the month of February were revised higher by 16k. The tighter labor market helped to drive the unemployment rate down to 4.4 percent, which is the lowest level since 2001. The other details of the report gave traders no reason to question the strength of the labor market. Average weekly hours increased by 0.5 percent while average hourly earnings grew by 0.3 percent, which was right in line with expectations. The labor market is the backbone of the US economy and as long as people have jobs, they will be far less worried about any contraction in the housing market because at bare minimum, they will be able to pay their mortgages. This will keep interest rates at 5.25 percent and delay any potential rate cut to the fourth quarter. With most markets around the world closed for the Good Friday holiday, the reaction in the currency market was sharp and fast. By 10am, which was right around the close of FX and Interest Rate futures on the CME, trading had grind to a halt. With such a blockbuster number, the Sunday / Monday market open could be exceptional volatile as the rest of the market reacts to the strong report. There is a decent chance for follow through at the open as traders initiate positions. Looking ahead there is a number of Federal Reserve officials scheduled to speak next week. Most of them have remained hawkish for some time, but their comments are now validated by data. In general, the Fed believes that the problems in the sub prime sector have not spilled over into the rest of the housing market and for the time being, upside inflation risks remain a bigger problem. This should keep the dollar in demand as we head into a relatively light data week. The only noteworthy data on the calendar are the producer prices and trade balance reports. We also have event risk, namely the Finance Ministers G7 meeting and the release of the minutes from the Fed's most recent monetary policy meeting.

Euro - German and French markets were closed today which explains why the only meaningful movement that we saw in the EUR/USD today was between 8 to 10 am EST (European markets will remain closed on Monday). Before and after that, the EUR/USD remained confined within a very tight trading range. The only piece of economic data from the Eurozone was the OECD's release of leading indicators, which remained unchanged at 109.3 for the month of February. In the week ahead, there are far more Eurozone data than there are US data on the calendar. The most important of which is the European Central Bank's interest rate meeting. Even though rates are not expected to be changed, it will be very important to tune into Trichet's accompanying press conference. The last time he spoke, he omitted the words strong vigilance from his speech, which indicated to the market that he wasn't going to follow up the March 14th rate hike with another hike in April. However, rates could be raised in May or June, especially since ECB officials have remained staunchly hawkish. Aside from the ECB meeting, Germany will also be releasing its current account balance and trade balance.