Non-Farm Payrolls Could Trigger Double Top in EUR/USD

Non-farm payrolls for the month of June are due for release tomorrow and now more than ever, with the EUR/USD trading near its record highs, the amount of jobs created last month will be critical in determining where the dollar is headed next. For the past few months, the stability of the labor market has pacified concern about the housing market because as long as people have jobs, they will continue to pay their mortgages.

However the problems in the housing market are worsening with sharp drops seen in existing, new and pending home sales for the month of May. In fact, pending home sales dropped by the biggest amount in more than 5 years which means that the US economy could be in serious trouble if the labor market buckles. Thankfully, the labor market will probably be spared in the month of June. According to the ADP employment survey released today, private companies added 150k jobs last month, which is not only far stronger than the market?s 100k forecast, but also represents the fastest pace of growth in seven months. Taken together with a 17 percent drop in layoffs and a jump in the employment component of the service sector PMI report - we have the recipe for strong and healthy job growth. Currency traders are already buying back dollars after this morning?s upside surprises. Whether this is just a bump in the road to further losses for the dollar or a double top in the EUR/USD and GBP/USD will ultimately be determined by Friday?s non-farm payrolls release. Even though the current consensus estimate for payrolls is 125k, according to the Bloomberg survey, the range of estimates is between 80k and 150k. This divergence suggests that payrolls can be anyone?s game, so as usual anticipate a volatile trading session tomorrow. For more on what to expect from the Non-Farm Payrolls release, see our Special NFP Outlook.