Euro Hits 1 Month Low, Sell-Off Could Continue (page 1 of 2)

DailyFX Fundamentals 05-01-08

By Kathy Lien, Chief Strategist of DailyFX.com


How Will Non-Farm Payrolls Impact the US Dollar?

The US dollar has strengthened across the board today ahead of Friday's non-farm payrolls release.

This may befuddle some traders as the greenback's price action conflicts with the higher jobless claims report and the deterioration in the employment component of manufacturing ISM.

According to our non-farm payrolls preview, job growth should decline for the fourth consecutive month. The market is currently expecting non-farm payrolls to fall by 78k and for the US unemployment rate to rise to highest level in three years.

There is even a possibility that job losses could hit -100k. Over the past month, consumer confidence hit a record low and planned layoffs as reported by Challenger Gray and Christmas increased 27.4%.

Continuing claims are also on the rise as the problems in the US economy escalate. Many people including Warren Buffet will agree that the US economy is already in a recession.

During the last three recessions, there was a string of job losses that lasted for a minimum of 10 months. If this is true, we could see far more than four consecutive months of job losses ahead of us.

In each of the past three recessions, the largest single month job loss was more than 300k. In this context, a 100k drop in April or May is not only realistic but nearly guaranteed.

However, weak non-farm payrolls may not be enough to halt the recent rally in the US dollar. After the hawkish minutes from the FOMC yesterday, traders have rallied the greenback on the expectation that the Federal Reserve will not be raising interest rates again in June.

Even if the drop in non-farm payrolls in the month of April is greater than the -80k decline in March, the Federal Reserve has the benefit of seeing the non-farm payrolls report for the month of May before making their next monetary policy decision.

Therefore the market's reaction to a bad number may be tempered for the time being and a good number of course would add fuel to the current rally in the US dollar.

Sentiment and technicals also point to further gains for the US dollar and weakness in the Euro, which is discussed further in our Euro commentary. Meanwhile the manufacturing ISM number was stronger than expected along with core PCE.

Although the 48.6 reading is still reflective of contractionary conditions, the performance of the manufacturing sector would have probably been worse had it not been for the benefits of a weaker dollar.

Euro hits 1 month low, sell-off could continue

The Euro hit a one month low against the US dollar today and the sell-off could continue.

At the beginning of this week, we outlined three reasons why the EUR/USD may continue to fall. The first was hawkish comments from the Federal Reserve, which we received.

The second was the first flip in the FXCM Speculative Sentiment Index in over a year with the index now growing more net long Euros since the last report.

The FXCM SSI is a contrarian indicator which means that a rise in net long positions is actually a bearish signal for the EUR/USD.

The third reason is technicals. Our technical analyst Jamie Saettele has been calling for a top in the EUR/USD for some time and now he expects the EUR/USD to break below 1.5342.

The sell-off could continue just because of technical and sentiment reasons, but German retail sales are also due for release tomorrow and we expect a sharp deterioration in consumer spending.