Dollar: Watch Non-Manufacturing ISM and ADP for Clues on Non-Farm Payrolls

Unsurprisingly, the markets have been extremely quiet with US traders off celebrating Independence Day. There has been little action in the foreign exchange market with the dollar strengthening only slightly against the British Pound and Japanese Yen, and weakening slightly against the Euro and commodity currencies.

Although the interest rate decisions by the European Central Bank and Bank of England should be the most market moving events tomorrow, traders will also be looking closely at the Service Sector ISM and Challenger layoff reports as well as the ADP Employment survey. With many US traders taking the remainder of the week off, we could see more than usual volatility from this Friday?s non-farm payrolls report. Unlike the manufacturing sector, the expansion in the service sector is expected to slow but having reached the highest level in more than a year last month, even a small dip leaves service sector activity at a lofty level. Unless we get a very hawkish outcome from the ECB and BoE meetings, further dollar weakness should be limited because the inflationary pressures are far more pressing at the moment than growth concerns. Oil prices continue to remain above $70 a barrel while stock prices refuse to fall. Since the beginning of the year, crude prices have increased over 40 percent and if it continues to rise, we could see a sharp jump in both headline and core prices. For more on the ramification of $70 oil for the currency market, see our Special Report. The Federal Reserve will only shift away from their hawkish monetary policy bias by seriously considering lowering interest rates when job growth falls below 100k. If companies stop hiring, then the US economy is in serious trouble. That is why payrolls going forward will be extremely important because the stability of the housing market is hanging by a thread.