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The markets have been preoccupied with Europe in the last few days but as we end the week the US economy comes back into focus. September's non-farm payroll report is released at 0830 ET/ 1330 BST, the market expects an increase of 55k after last month's reading was flat; the unemployment rate is expected to stay steady at 9.1%. Risk has continued to extend gains after the ECB and BOE meetings yesterday were considered pro-growth, but the focus now shifts to the US and labour market data will be key to sustain this rally further.
· There seems to be a shift in market sentiment. Now that Europe has set the wheels in motion to re-capitalise its banks and it appears that Greece will receive its next tranche of bailout funds some optimism has returned to the markets. The sell-off in recent weeks was mostly due to a shattering of confidence, so once European policy makers started to make the right noises about boosting the banks and expanding the EFSF to a realistic size it is not surprising that risk has bounced back.
· The market is also reacting well to news that global central banks are willing to do their bit for growth and liquidity. Both the ECB and BOE announced measures to 1, pump the economy with money and boost lending (BOE) and 2, ensure banks, regardless of quality, can access funding when other channels are closed to them (ECB).
· This is what the markets are focused on right now, and even a credit rating downgrade of 12 UK financial institutions by credit rating agency Moody's didn't dampen sentiment. The downgrade was not much of a surprise. Moody's justified it by saying that banks can no longer rely on government support if they get into trouble. This was also the reason for US bank downgrades earlier this year. Interestingly, as the US and UK step back from offering government support to the financial sector, the Eurozone is about to get a lot more involved in its banking sector.
· US growth. The US has been in the periphery of the market's vision recently as Europe took centre stage, however payrolls is a key indicator of the strength of the US economy. In the last three months the average number of jobs created each month was a mere 35k. This suggests an economy that is barely growing at all. The market is looking for 55k in September - as long as it is 55k or over then it may be enough to ease investor fears about US growth. This month's data could be affected by the end of the Verizon workers strike that included 45,000 employees. This is one of the reasons for the depressed reading in August, so the risk is that the number exceeds forecasts. The employment index of the manufacturing ISM rebounded in September from 51.8 to 53.8. This follows payrolls closely and it suggests an improvement in the pace of job creation after a summer slump.
· Watch out for a meeting between German and French officials on Sunday. They will discuss plans for bank re-capitalisation. The market has rallied on plans for bank re-capitalisation, but to sustain optimism it needs to see concrete action from Europe's leaders in the coming weeks. As we have found out, talk is cheap especially when it comes down to solving the sovereign debt crisis.
· After a slight wobble, stocks are higher so far in the European session. Even the UK banking sector has shrugged off the Moody's downgrade. As we have said before, this rally is being led by the banking sector in Europe because its health is key to avoiding a global credit crunch. Europe's banks are higher today, and what is good for the banks is good for the overall market.
· The dollar is lower across the board; we may see another 50 pips or so of broad-based dollar weakness before DXY hits support at 78.00. This is EUR and GBP positive.
· QE - what QE? The pound has clawed back all of yesterday's losses after falling to 1.5300 vs. the dollar. The pound is strong across the board today and EURGBP is even trading lower. We don't think the pound will maintain an upward bias however, and believe that sellers may come in from 1.5550 - ahead of 1.5525 - the 200-hr sma.
· EURUSD: 1.3425 is good support - 200-hr sma. It is running into resistance at 1.3450 - we could see it tread water before payrolls later today.
· USDJPY is fairly stable after the BOJ kept rates on hold today. EURJPY is showing signs of a rounded bottom after making a base around 100.70/80. If the risk rally continues then we may see to 105.00 initially.
· The Aussie has had a storming session - however, the hourly MACD and RSI look at a little overbought and the future of this pair depends on the outcome of Labour market report in the US later today. 0.9850 in AUDUSD is the next major resistance level, although it may be sticky around 0.9800 where the rally has lost a bit of steam so far this morning.
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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