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In an environment where central banks are driving price action then a bad payrolls number can negate the safe haven impact of the dollar and cause the euro and stocks to surge. Payrolls increased by a dismal 96k in August, the rate was dragged lower by net job losses in the government, mining and manufacturing sectors. Earnings data also fell, with the average weekly wage dropping to $809.09 vs. $809.43 in July.
The drop in the unemployment rate isn't even the silver lining to the NFP cloud as its decline was due to a steep fall in the participation rate (the number of people in the labour force), which fell to 63.7% from 64.3% in July. This is a huge drop and it will be interesting to see what has caused this decline and if it is a structural shift in the US labour force or if it is reflective of shorter term influences. The participation rate seems to have gathered as many headlines as the NFP figure today, suggesting that people can see through the drop in the unemployment rate for what it was: a statistical quirk. Either way this labour market report has been a gift to the Republican Party. It was always going to be a deeply political report due to its timing, which is so close to the Democratic and Republican conventions, and this one is probably better news for Romney and co. than it is for team Obama.
The Federal Reserve meeting now comes into sharp focus. Read our Week Ahead report later today to find out our take on what to expect when the FOMC meeting concludes next Thursday. However, after that payrolls report the markets are pricing in a 75% probability of more QE from the Fed next week.
Elsewhere, the ECB bond-buying programme continues to have a positive impact on the market. The euro has rallied all day and was above 1.27 before the payrolls report. It is moving higher in line with the decline in Spanish bond yields, which are back at 5.75%. If we get back to the 5% zone in the coming days then this rally could be extended towards 1.30. Even the economic data was supporting a stronger euro today. German imports and exports both rebounded in July; likewise, the trade balance was stronger for July at EU16.9bn, vs. exp of EU15.3bn. Industrial production also jumped, rising 1.3% on the month. Production data was also stronger in the UK, with manufacturing production rising 3.2% in July. This is another sign that the economy bounced back in Q3 after the Jubilee bank-holiday induced slowdown in Q2.
So as we get to the end of the European week, we choose three Ones to Watch:
1, EURUSD: the break above 1.2750 is an extremely bullish signal for this pair as that was a significant resistance level and double top from June 2012. This opens the way for a move to 1.2840 in the near term - the 200-day moving average. It appears that people may have unravelled their Eurozone catastrophe trades in the wake of yesterday's ECB meeting, which is euro positive. It may also be symbolic of investors' focus shifting from the Eurozone to the US as we edge closer to the 2013 fiscal cliff and the Presidential elections. This pair is in deeply overbought territory on a short term basis so a pullback on Monday would not be unexpected, however this pair looks well supported above 1.27.
Gold: The precious metal feeds off central bank stimulus and the prospect of Fed easing has been enough to push this pair above $1,700. But where does it go next? The markets have a tendency to sell off post a QE announcement by the Fed, so we could see some stickiness around the $1,750 level. If we are to extend gains towards $1,800 it will depend on the type of QE the Fed does. If it decides to up the ante and throw $1 trillion into the economy, or to say that bond purchases will be unlimited then expect gold to surge. We just don't know if he will be as aggressive as that. Support lies at $1,705 then at $1,680 - the 55-day sma.
GBPUSD: this pair is benefitting from the overall dollar sell off. Life above 1.60 will depend on 1, QE from the Fed in the short term and 2, positive economic surprises in the long-term. This pair is starting to look overbought, so we would not be surprised to see a sell off back to the 1.5980 then 1.5955 level in the near-term. However, a weekly close above 1.6020 is a very bullish development for this pair and suggests further gains to 1.62 in the near to medium term.
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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