FOREX: Dollar Trend in the Balance as Markets Look to US Jobs Report

Key Overnight Developments

• Aussie Dollar Soars as RBA Upgrades Growth, Inflation Outlook
• Euro, Pound Range-Bound as Markets Brace for US Jobs Report

Critical Levels

The Euro and the British Pound held to narrow ranges in overnight trade as currency markets consolidated ahead of the upcoming US jobs report. We favor a bearishbias for EURUSD and GBPUSD.

Asia Session Highlights

The Australian Dollar outperformed after the Reserve Bank of Australiaraised its 2011 economic growth and inflation forecasts to 4.25 percent and 3 percent respectively in its Quarterly Monetary Policy Statement. The central bank was previously expecting the economy to add 3.75 percent while inflation averaged 2.75 percent.

Most importantly, the upgrade comes in spite of damage from record-level flooding in Queensland – which the government reckons will trim 0.5 percent from GDP this year – as well as looming slowdown in China, hinting the outlook rate hikes may be more robust than previously expected notwithstanding the dovish tone of the last policy meeting. The Aussie rose as much as 0.4 percent on average against the major currencies.

Euro Session: What to Expect

With no significant event risk on tap in Europe, traders are likely to look ahead toward the US employment report due to cross the wires late into the session. Expectations call for the economy to add 146,000 jobs in January, marking the largest increase in three months. The Unemployment Rate is expected to nudge higher to 9.5 percent as previously disheartened workers step off the sidelines and renew their job search, putting them back into the labor force calculations.

Perhaps the most significant question from a trading perspective will be whether this release is interpreted along the lines of economic fundamentals or risk sentiment. In the former scenario, the outcome ought to stoke optimism about the pace of economic recovery, boosting the outlook for interest rates and driving the US Dollar higher. In the latter, improving labor conditions in the world’s largest consumer market may be seen as good news for the global recovery at large and drive stocks, growth-sensitive commodities and risk-linked currencies higher at the expense of the greenback via its profile as a safe haven asset.

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