New concerns about the risk of a recession for the U.S. economy were raised on Friday as the government jobs report showed the first decline in employment in four years. The report noted a net loss of 17,000 jobs for January. This figure was partly offset by an upward revision for December. In addition to the jobs loss, the unemployment rate slipped to 4.9% following a forecast of a steady 5.0%.

Despite the revision for December, the report triggered initial weakness in the USD. The EURUSD popped higher in New York following the release of the employment data. The market had been trading cautiously for two days, near the all-time high of 1.49672. A bearish report was expected to trigger the start of another prolonged sell-off in the USD. After a reaction rally in the EUR, sellers quickly surfaced, and the market settled lower for the day. Much of the early strength in the EUR was attributed to technical factors such as short covering from retail traders who had built large positions against a minor top at 1.49209. The true short sellers seemed to have appeared at 1.49527, leaning against the all-time high. Friday's action indicates perhaps that the USD bears are willing to allow time for the recent FED rate cuts to take effect.

In a longer-term view, the weakness in the labor market is triggering concerns among economists, and most likely will rekindle talk of further interest rate cuts by the Federal Reserve. The FED has been using evidence of softening in labor markets as one of its key reasons for lowering rates. Further cuts to prop up the economy will be additional evidence that the FED is focused more on the economy than on the USD.

One key factor to continue to watch over the next few months is the effect the $150 billion stimulus package passed by Congress has on the U.S. economy. This package is expected to add an additional 500,000 jobs to the economy. Only time will tell if this move will bail out the economy since it is not expected to kick in until May. In the meantime, the FED will have to continue to study U.S. economic data for signs of further economic erosion.

Next week’s reports include Factory Orders (2/4, 10:00 EST), ISM Services (2/5, 10:00 EST) and Preliminary Productivity (2/6, 8:30 EST). Looking further ahead, on February 20, the FOMC minutes from January 30 should contribute to market volatility.

Technical Analysis

EUR/USD – The EURUSD surged higher following the release of the U.S. employment data, making a new high for 2008, but failing to penetrate the all-time high from 11/23/07 at 1.49672. The outside move and reversal down indicates some serious sellers emerged at the high levels. Although a reversal top does not change the daily trend to down, it is expected to put downside pressure on the market over the short term. Expectations are for a minimum 50% correction of the 1.43645 – 1.49527 range to 1.46586. A break to this area is likely to attract buyers on the first test. Follow through selling is needed on Monday to confirm the reversal top. Sellers have to show up with conviction on Monday to trigger the 50% correction. A failure to confirm the reversal top is likely to trigger short covering and additional buying which could be what the EURUSD needs to take out the all time high and rally to 1.50. The market still needs time and pattern to signal the start of a major down move, but the size and duration of the sell-off truly points out where the major resistance lies.

USD/JPY – As mentioned in previous comments, the tighter they wind this market, the more volatility to expect. The trend remains down until 107.88 is crossed. Sellers are not expected to cover until this price is penetrated, but the bulls have been making it difficult as they continue to support a counter trend trade inside of a key retracement area at 106.42 – 106.08. Despite two consecutive penetrations through this zone, the market has quickly recovered and posted decent closes. The strength of the market is going to be determined by the size of its base so the longer we stay in this tight range and build support, the stronger the breakout to the upside. Trend traders should sit tight with stops above 107.88. Counter trend traders should remain cautiously bullish as long as we continue to close over 106.08 and hold 105.70.

GBP/USD – Despite the hard sell-off, the trend is up on the daily chart. The key to sustaining the early stages of this developing trend is for buyers to surface in the 1.964 – 1.957 range. This action would complete a normal retracement following the weekly reversal from the 1.933 bottom on 1/25/08. Daily/weekly reversal bottoms are usually indicative of short covering. It is the subsequent break following the initial rally, which attracts new buyers. This is why the retracement area mentioned above is a major area. If it holds, all indications are for the GBP to rally further to complete a major retracement up to a near term target of 2.024 – 2.046. A failure to hold the potential support zone indicates a retest of the low at 1.933. In summary, the GBP is in a position to test a major support area, which could significantly change its direction over the short term. A failure of this supportive pattern to develop is likely to lead to sharply lower trading.

USD/CHF – Friday’s commentary warned of putting on additional shorts at current levels despite new lows. We also identified the potential for a closing price reversal bottom because of oversold conditions. Both comments proved to be true as the USDCHF posted a new low and closed higher. Although only a daily reversal bottom, the daily chart set-up indicates the potential for a rally to 1.116. Despite the strength of the rally, this market still has to build a base to support the start of a change in trend. This means that new selling could surface once again at 1.116. Counter-trend traders should look for a 50% pullback of this first up leg to hold. If new buyers come in on this retracement, then look for higher markets to follow.

USD/CAD – Friday’s action supported our earlier conclusion that the long-term downtrend appears to be ready to resume. As long as the market stays under 1.008, expectations are for more selling to push it to .9716. Buyers may surface at this price to trigger another short-covering rally. Shorts have to arrive with conviction next week on selling through .9872 otherwise the market may begin a sideways drift. Regaining .9960 may put the market back in a somewhat friendly tone. A trade through 1.008 indicates 1.017 is next.

NZD/USD – The NZD remained strong against the USD as it broke out above resistance at .7936. Based on its rectangular pattern it appears to be set up for a retest of highs at .8107. Following this breakout, the market may retrace slightly inside of the old tops before moving higher. The trend remains up unless .7365 is violated.

AUD/USD – The strong follow through rally from the .8511 bottom on 1/22/08 took out near term resistance at .9017. The market regained an important 50% price at .8958 making this price new support. The next upside target is the .618 retracement at .9063. Further strength will be evidenced by a break out through this level, thereby setting up more upside with .9399 the next upside target.

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