The markets are in a bit of a lull prior to this afternoon's payrolls data. After the rout in the euro yesterday, the single currency has stabilised around 1.3620. Although the US labour market report will be the focus for today, any comments from the EU summit could also affect market sentiment. Although the recent rally in EURUSD was mostly fuelled by expectations of rate hikes by the ECB, sentiment was also boosted by the markets giving EU officials the benefit of the doubt that they could come up with a credible long-term solution to the sovereign debt crisis. If EU leaders fail to deliver the goods there could be another leg lower for the single currency. Ultimately, as we end the week the fate of the euro lies with payrolls and politicians.

Elsewhere, the dollar is fairly static along with the pound. GBPUSD is currently trading at 1.6120, a strong payrolls number (above the 146k expected by the market according to a Bloomberg poll) could see it slip below 1.6100. However, the uptrend is still in place above 1.5800, the top of the Ichimoku cloud chart, and a key technical indicator.

Many a good analyst has been undone by predicting payrolls as the volatility of the number, and sometimes complete detachment from the perceived economic norm, is well-known. But there are growing signs that the labour market in the US is improving. The ISM non-manufacturing survey picked up to its highest level since 2005 in January, and the employment sub-index also gained strength rising from 52.6 in December to 54.5 in January, anything over 50 indicates that intensions by employers to hire are growing. A similar boost is happening in the manufacturing sector, which saw the employment index rise to a stellar 61.7 in January, up from 58.9 in December. However, alongside this the trend in initial jobless claims has also been climbing higher, last week it rose to 430,500 from 429,500 the week before. While this could be down to some disruption caused by severe weather in the US, it suggests there isn't yet a strong upward trend in employment growth. Thus, the payrolls of 146k seem to be in-line with the lacklustre economic signals.

It is worth pointing out that although the employment rate is forecast to rise to 9.5 per cent from 9.4 per cent in December, this is mainly due to a statistical quirk. In December a larger than normal number of people left the labour force, causing the unemployment rate to contract by 0.4 per cent. But people are expected to have returned to their job searches with the start of the new year, so the market shouldn't be too alarmed if the unemployment rate does tick up by 0.1 per cent or so.

Fed chairman Ben Bernanke once again tied the future of QE and interest rates to the unemployment outlook during a speech to the National Press Association in the US last night. He said there could be a prolonged period of high unemployment in the US, which warrants lose monetary policy. When Trichet is compared to Bernanke he sounds like a hyper-hawk. The contrast in stance between the two central banks (ECB focuses on inflation risks getting out of control vs. Fed worries about employment growth) should keep the yield premium firmly on the side of the euro even if Trichet disappointed euro bulls yesterday with his failure to signal any near-term hikes in the interest rate.

The Swiss franc has come off the boil after comments from Swiss central bank officials about the strength of the currency. This has led to reduced expectations of a near-term interest rate hike. This is in contrast to the Aussie dollar, which rallied strongly during the Asian session after the latest RBA monetary policy report that noted that the economic effects of the floods will be temporary. The Bank also revised higher its expectation for growth this year to 4.25 per cent from 3.75 per cent.

Elsewhere, Canadian employment data is also due. There is a risk that the number of jobs created will come in below the 15k expected after the Finance Minister warned of challenging labour market conditions. While this may weigh on the loonie, it is the outlook for the US economy that may have more of an impact on the CAD. A strong employment report from the US could lend support to the CAD, due to the tight relationship between US and Canadian economic growth.

After strong ISM service sector and manufacturing data earlier this week we will have to wait until 1330 GMT to see if employment is still the missing link in the US economic recovery.

Data watch:


12.00 CD Unemployment rate Last 7.6 Exp 7.6

12.00 CD Net employment change Last 22K Exp 15K

12.00 CD Participation rate Last 66.9 Exp 67.0

13.30 US Non Farm payrolls Last 103K Exp 146K

13.30 US Private Non Farm Payrolls Last 113k Exp 145K

13.30 US Unemployment rate Last 9.4 Exp 9.5

13.30 US Average hourly earnings Last 0.1 M/M 1.8 Y/Y Exp 0.2 M/M 1.7 Y/Y

13.30 US Average hourly weekly hours Last 34.3 Exp 34.3

15.00 CD IVEY PMI Last 50.0 Exp 53.2

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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