The jobs number for the month of June was bad but not bad enough to stifle the gains in the US dollar. Non-farm payrolls fell by 62k, the sixth consecutive decline in a row. The April number also was revised down from -49k to -62k while the unemployment rate remained at 5.5%, matching the highest level since October 2004.
Anything short of 100k would have been dollar positive and that is exactly how the market reacted today. The biggest contributors were healthcare, education, leisure and government. The biggest losers were in goods producing and business services.
The importance of the NFP number depends upon how it impacts the Fed's monetary policy decisions and today's drop in jobs will not hold them back from raising interest rates in the third or fourth quarter. But the Fed needs to be very careful because jobless claims this week broke the 400k level. They came in at 404k this week, just shy of the 3/28 levels, which was the highest in 2.5 years. The labor market will get worst, but probably not as quickly as inflationary conditions, which is why the Fed will barely bat an eye at today's NFP numbers.
As for the ECB, so far, Trichet is moderate. After raising interest rates by 25bp this morning, he continues to harp on the risk of further upside inflationary pressures but at the same time he remains concerned about growth. Further rate hikes seems to be on the tip of his tongue, but Trichet does not want to spook the markets right now which is why he is simply leaving the door open for another rate hike this year. This is of course a disappointment to Euro bulls especially since Trichet said that he has "no bias."
The Euro has weakened against the US dollar post NFP and ECB, but the knee jerk sell-off may be a tad overdone. Euro weakness should be limited because the market still expects 3 rate hikes from the ECB over the next 12 months.
By Kathy Lien, Chief Strategist of DailyFX.com