DailyFx

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.

Euro Slips after ECB Fails to Indicate that “Strong Vigilance” is Needed
The European Central Bank left interest rates unchanged at 4 percent and hinted that rates will continue to remain on hold at the August meeting. Trichet did not use the words, “strong vigilance” which has been code for “expect a rate hike at the next meeting” and interestingly enough, he even pointed out that these words hold particular significance. The central bank clearly does not want to see the EUR/USD at 1.40 and Trichet even went so far as to say that “we are in domain (in regards to exchange rates) where it is very important to be responsible.” As an export dependent economy, a strong currency could eventually reverse the trend of growth. The futures curve is currently pricing in one interest rate by the end of the year. Trichet indicated that he does not want to alter the market’s expectations for further tightening in September or October. The level of overall inflation and oil prices will be extremely important in determining which month the hike will be delivered. Should oil prices skyrocket because of a surprise hurricane or something else to that degree, the ECB may have to act prematurely. They already indicated that even though the August meeting will be held via teleconference, they will not rule out a press briefing or press conference to announce that “strong vigilance” may be needed once again.

Bank of England Raises Rates; 6 Percent Becomes a Possibly
As expected, the Bank of England lifted interest rates for the fifth time since last August by 25bp to 5.75 percent. The price action of the currency pair indicates that the move was completely priced into the market. The knee jerk rally was quickly reversed as traders came to the realization that even if the Bank of England were to raise rates again this year, they would wait a few months before doing so. In the accompanying statement, the central bank indicated that the inflation risks remains to the upside and they are concerned that it will remain above their target for some time. This is a clear signal that interest rates will be taken to 6 percent this year and it is just a matter of when. Bond yields have moved higher on the back of the announcement, but having climbed significantly going into the latest rate decision, we could see a continued correction in the GBP/USD. The minutes from this meeting will not be released for another few weeks – the balance of the votes will shed more light on how urgent the central bank is to raise rates again.