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The markets have managed to shrug off some fairly dismal services sector PMI data from the Eurozone, as the US non-farm payrolls data comes into focus. Arguably the most important economic data release of the month, the markets expect 160k but our prop model suggests a slightly weaker reading of 136k. Labour market data in April was fairly mixed but the overall bias was to the downside with the 4-week moving average of initial jobless claims rising more than20k over the month.

Payrolls reports have the power to set the tone for how markets, and the dollar in particular, trade for the rest of the month. The weaker March NFP report stopped the rally in USDJPY in its tracks, for example. So what can we expect from today's report? Essentially the magic number is 200k - this is the amount of jobs that the US needs to create to bring down the unemployment rate. We know that the Fed is watching the unemployment rate closely and if this fails to fall in the coming months then it makes the prospect of QE more likely going forward. Thus, an NFP print today below 200k would keep the prospect of more QE squarely on the table.

Payrolls can be notoriously difficult to predict. Initial jobless claims have been weakening and the ADP private sector payrolls report missed estimates last month, however the employment section of the ISM non-manufacturing survey rose to 57.3 up from 56.1 in March, and well -above the 6-month average of 54.7. Added to this, payrolls tend to disappoint historically in April, which makes today's number even harder to predict. Due to this traders need to be aware of the potential market reactions to the various outcomes. A 200k+ number may help the dollar to rally and could cause a knee-jerk bounce higher in US stocks. In this scenario EURUSD would be at risk of breaching the key 1.3050 support zone, below which suggests that this cross is in a downtrend. A reading around consensus of 130k-160k could see a bit volatility around the announcement but we would expect EURUSD to remain in its 1.3100 - 1.3220 recent range. A weak NFP number could cause the dollar to weaken in the medium-term as it would make more QE from the Fed more likely.

A lot of investors want to know what it will take for EURUSD to break out of its long-term 1.3050 - 1.33 range? The prospect of more QE from the Fed could cause EURUSD to break above 1.33 and target 1.35 in the medium term. However, we don't think that a stronger euro is particularly sustainable at this stage of the sovereign debt crisis. Political risks in the Eurozone may be more of a concern for FX investors right now. A Socialist win for France and the prospect of no clear winner in this weekend's Greek elections could threaten the release of more bailout funds to Greece enhancing the prospect of outright default for the Southern Mediterranean nation. Thus, the spike in volatility that could get markets moving again may not come from the ECB or from economic data but from ordinary Europeans at the polls.

So there is a lot for investors to digest right now. After Draghi's less dovish than expected press conference yesterday the onus is now on the European authorities to deliver a punchy growth pact at the June 20th G20 meeting. Eurozone PMI's for April sunk to multi-month lows, in Spain the services sector PMI fell to 42.1, well below expectations, suggesting that growth in the struggling peripheral nation could get worse before it gets better.

In the UK it looks like Labour  had a good showing in local elections, however the Conservatives are likely to hang on to the jewel in the crown - the Mayor of London role - as Boris Johnson is expected to have won yesterday's election by a comfortable margin against his Labour rival Ken Livingstone. We don't expect these results to have an impact on the pound.

Market moves:


Things are quiet out there today as is typical in the build-up to the NFP release. EURUSD moved lower after the weaker PMI data and stronger retail sales had no effect. Right now we are trading in a 1.3100 - 1.3165 range. 1.3165 is a key level for this pair, a weekly close below would be incredibly bearish as it is the bottom of the daily Ichimoku cloud and below suggests further declines.

The pound has declined today as the dollar moves higher on a broad-based basis. Weak UK house prices helped to weaken this cross. 1.6150 is key support, below there could open the way back to 1.6060. This cross remains in an uptrend even though it is consolidating gains right now.

EURUSD and US stocks may be the key movers to watch post the NFP report. However, a weak number could help AUDUSD bounce higher into the weekend. This pair fell further today after a dovish RBA monetary policy report caused it to sink below 1.0250. The next support level is the 1.0225 low from April. AUDUSD bounced off this level last month, so all eyes will be on whether the bears can push it even lower, potentially towards parity in the medium-term. But a weak payrolls report could see some temporary respite as investors flee the dollar. Key resistance lies at 1.0350 - a cluster off hourly smas.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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