Dollar Looks to NFP

Meanwhile in UK  Services PMI zoomed to 59.7 from 57.0 in September registering the highest reading since April and printing far above expectations.  One of the more positive aspects of the report was the marked rise in new business as well as a rise in future expectations.  Only the employment component showed some weakness slipping slightly from the month prior. Nevertheless the PMI services report is yet another solid argument for a BOE rate hike at its November MPC meeting next week.  While the pound showed little strength against the greenback it rose against the euro  with the  EUR/GBP cross slipping below the .6700 level once again.  The action in this cross has surprised most market analysts who had expected it strengthen as EZ rates climbed higher into the year end while UK rates remained stationary. In fact the opposite has happened. Despite Mr. Trichet’s hawkish rhetoric, the ECB chose to keep rates unchanged yesterday, while the BOE is now favored to move to 5% money in November.  Should UK central bankers meet expectations the cross may see further weakness as long term positional bets will be forced to unwind.

Finally turning to NFP we will simply quote our colleague Kathy Lien who noted yesterday, “We believe that it would be quite disastrous to see anything less than 100k but judging from economic data that has already been released, this downside surprise will probably not materialize. “ In ADP we trust? Yes we do. Most critical to our mildly bullish stance on the payroll number is the fact that the payroll provider has been able to fine tune its forecast model and has accurately predicted the payroll results within 20K of the actual print for the past three months running. In the notoriously volatile NFP series this is the economic equivalent of bulls eye. With ADP estimates at 128K the NFP should be able to report gains in excess of 100K. Other tangential data such as the sharp drop off in Challenger layoff figures also point to slightly better results this month.  Despite our guarded optimism the chance of a miss remains substantial especially in light of the fact that recent US economic data has hardly been robust. Nevertheless, the October NFP report may show a surprising burst of demand in the US economy perhaps spurred by lower energy costs to businesses. All of which may provide the dollar with some wind at its back.