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As we close the week not even a good payrolls report could halt the fall in the euro. Rather than cause the dollar and other safe havens to fall, the strong payrolls, which came in at 2200k vs. exp of 158K for December, caused a rally in the greenback. If you look at what some market commentators are saying then it is because the headline figure of 200k isn't telling the whole picture: it includes a seasonal quirk that could have boosted the NFP number to the tune of nearly 50,000. This happened in 2009 and 2010, and in both these years payrolls gave back some of these gains in the next month's report.
If you take this into account then payrolls are growing by a less stellar, but still solid 150k, which is much closer to today's estimate. However, I would be overly pessimistic if I dismissed this report entirely; there are definitely some bright spots for the US economy. Overall payroll employment has risen by 1.6 million in the last 12 months, which is fantastic when compared to the UK and Europe. Also, while the government sector cuts workers the private sector is proving it is well able to pick up the slack. Added to that, manufacturing employment is moving higher and even the hobbled construction sector added 20,000 workers in the non-residential sector, which reversed recent losses.
So why didn't the euro react? There are still plenty of event risks for Europe next week: Spanish and Italian bond auctions, politicians meetings and of course the ECB on Thursday. Greece is also raring its head once more and its next bailout tranche has been delayed for three months, leaving Athens without cash perilously close to its first major bond redemption on March 20th. Added to this pressures in Hungary threaten Austria's banking sector, so that is also weighing on sentiment.
As we end the week the euro seems more in tune with the bond market than with equities: Italian 10-year bond yields are above 7.1% and the euro is hovering around 1.2700 - 100 pips below where it opened this morning.
Stocks haven't been hit as hard today and are down less than 1% - however a lot of Europe is out for the Epiphany holiday. However, the SPX 500 is making hard work of 1,280. This is a concern since it is the neckline from the head and shoulders pattern that formed back in March- June 2011. If it fails to break then it opens the way to decline to 1,100.
Added to that, even the dollar - the currency to buy of choice during the recent market rout - could run into some resistance. It is currently testing 81.30/40, which was a double top back in December 2010 and mid-January 2011. So is the market giving us mixed signals or are we at an inflection point? If the dollar fails here then we could see a reversal higher in the euro. The spec community is already positioned short euro, so how much lower can it go? Expect sharp short squeezes that could be painful as the euro meanders lower in the next few weeks. The next resistance level of note is 1.2835.
So, if you can, relax this weekend, as it next week could be busy.
SPX 500 daily chart with neckline from 2011 H%S pattern that is proving tough resistance at 1,280.
Source: FOREXTrader PRO
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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