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USD Looks Higher As NFPs Limit Fed’s Scope- EUR Hopes To Fizzle

By , Currency Analyst
05 October 2012 13:05 GMT

Talking Points

  • U.S. Dollar: NFPs Increase 114K, Jobless Rate Tumbles To 7.8%
  • Euro: EU Talks Down Further Support for Spain, Greek Debt Restructuring
  • British Pound: BoE Policy To Support 1.6065 Rebound

U.S. Dollar: NFPs Increase 114K, Jobless Rate Tumbles To 7.8%

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) snapped back from a low of 9,864 as the U.S. economy added another 114K jobs in October, while the annual rate of unemployment unexpectedly weakened to 7.8% from 8.1% to mark the lowest reading since January 2009.

Although discouraged workers continued to leave the labor force, we saw new blood entering the job market, and the ongoing improvement in employment should dampen the Fed’s scope to expand monetary policy further as the recovery gradually gathers pace.

As the developments coming out of the world’s largest economy continues to instill an improved outlook for growth, we should see the FOMC endorse a wait-and-see approach over the near to medium-term, and the central bank may strike a less dovish tone over the coming months as the region gets on a more sustainable path. As a result, we should see the USDOLLAR continue to retrace the decline from June, and the index looks poised to work its way back above the 61.8% Fibonacci retracement around 9,949 as market participants scale back speculation for additional monetary support.

Euro: EU Talks Down Further Support for Spain, Greek Debt Restructuring

The Euro bounced back from an overnight low of 1.2993 as the EU talked down the risk for another debt restructuring in Greece, but the ongoing threat for contagion continues dampen the appeal of the single currency as the governments operating under the monetary union struggle to get their house in order.

Indeed, the EU sees Greece reaching a deal with the Troika following the October 8 summit, while the group argued that Spain will not need to tap the European Central Bank’s unlimited bond-buying program as market conditions improve. However, as the periphery countries struggle to get their house in order, the push for greater austerity will continue to drag on economic activity, and the heightening threat for a prolonged recession instills a bearish outlook for the EURUSD as we anticipate the ECB to embark on its easing cycle throughout the remainder of the year.

As the economic docket for the following week is expected to show a weakening outlook for the euro-area, the deepening downturn in the region should reinforce a bearish outlook for the EURUSD, and we may see the pair threaten the upward trend from the end of July as exchange rate remains capped by the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around the 1.3120 figure.

British Pound: BoE Policy To Support 1.6065 Rebound

The British Pound appears to be making another run at the 23.6% Fib from the 2009 low to high around 1.6200 as it pares the overnight decline to 1.6172, and the sterling may track higher over the near-term as former trendline resistance holds up as interim support.

Although the data on tap for the following week is expected to dampen the outlook for growth, the fundamental developments coming out of the U.K. may continue to top market expectations as the region appears to be emerging from the double-dip recession. In turn, the Bank of England Minutes on tap for October 17 may highlight an improved outlook for Britain, and we may see the central bank soften its dovish tone for monetary policy as the stickiness in price growth limits the risk of undershooting the 2% target for inflation.

As the shift in the policy outlook instills a bullish outlook for the British Pound, the rebound from the weekly low (1.6065) may gather pace in the days ahead, and we will maintain a bullish outlook for the sterling as the BoE slowly moves away from its easing cycle.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

17:00

13:00

Fed's Elizabeth Duke Speaks on U.S. Economy

USD

19:00

15:00

Consumer Credit (AUG)

$7.500B

-$3.276B

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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05 October 2012 13:05 GMT