Will NFP Save The Dollar From Further Losses?

[Fxgreece]

by Lena Manousaridi

The big day is here, with markets getting prepared for the event of the month, the non farm payrolls. All currencies move in tights ranges and its clear that the market doesn’t have direction at the moment as all attention will be turned in the release later this afternoon.

Lets see what happened yesterday with the two rate decisions from the European banks. The fact that BOE left its key rates unchanged, left many investors disappointed as there were some noise that they might cut as early as yesterday. The fact that there was no statement afterwards, like last time, gave the traders the excuse to buy the pound all across the board and make GBP/USD move up around 100 points in a few minutes. Although the general feeling was that rates would be unchanged, however this aggressive sterling buying showed us that investors were positioning themselves for at least some signal that the bank is getting ready to cut. With the recent negative economic data, along with softer CPI, one would speculate that the bank would move towards easing sooner rather than later.

After the BOE decision, it was time for Trichet and his pals, with ECB leaving the rates unchanged too. When the press conference started, EUR/USD was moving sideways waiting for key words to be mentioned and when Trichet failed to use words like “accommodative” or even “vigilant” the pair moved much lower towards 1.4070. When asked by the journalists of what the bank was doing regarding the recent euro strength, Trichet was once avoided clear answers but nevertheless repeated what he already said about a strong dollar stance. Although ECB failed to mention the consequences of a strong European currency in the future decisions, market did take his words as a signal that the bank will pause hiking for now until further signs of inflation arise. All in all, Trichet was dovish and more speculations now arise as to what his next move will be.

EUR/USD is still trading under 1.4175 and if data today help, we might see a continuance of the latest correction that the dollar started this week. However, beware of fake signals after the data, because with euro being in these levels anything is possible. All forecasts want the payroll data to be better for the greenback with 100000k new jobs being added last month. After the negative number we had last month, any improvement will help, however due to the negative dollar sentiment we need to see a very good number in order to regain some kind of confidence for further dollar gains.

Many analysts believe that although the sub prime crisis is far from over, they still see the economy starting to peak up in the next months and therefore Bernanke and co won’t proceed in many more cuts as initially was thought. That will certainly help the dollar regain some ground against its other currencies and EUR/USD move towards 1.40 rather than 1.45.

However, please don’t think for once that the EUR/USD trend is anything but upwards. In order to start thinking reversal we need to see at least 1.3830 being taking out and the euro to stay under 1.42.

Before we start saying things like “dollar is the new way to go”, lets see first what todays news bring and next what the inflation data will be in the coming weeks…
Note: It will be advisable to stay out of the market before the news, and even then if the number is mixed, wait for a clear signal which is usually given at least 15 minutes after the announcement…