US Dollar Down as NFPs Disappoint - Watch for Currency Focus in Weekend G7 Statement

The US dollar ended the day down across the majors, but the currency's moves were really contained to about two hours of price action at the start of the US trading session as the markets did little throughout the afternoon and into the market close. The US dollar initially spiked higher following the release of US non-farm payrolls (NFPs), which were disappointing at -263,000 in September, compared to forecasts for a reading of -175,000. Furthermore, this represented an acceleration in the pace of job losses, as NFPs dropped by a revised 201,000 in August, putting a dent into the argument that the US recession is over. Likewise, the annual rate of average hourly earnings slowed to a more-than four-year low of 2.5 percent from 2.6 percent while the official unemployment rate rose to 9.8 percent - the highest since June 1983 - from 9.7 percent.

Providing an even more daunting view of the employment picture is the Bureau of Labor Statistics' (BLS) U-6 measure of the unemployment rate, which includes people who have part-time jobs but are seeking full-time work, as well as discouraged people who have given up looking for work. The U6 rate has surged to a whopping 17 percent in September from 16.8 percent, and while it's difficult to put this series into historical context given that it only started in 1994, there's a large proportion of consumers in the US that are suffering financially from a lack of full-time jobs. This suggests that there are still significant downside risks for consumption, which makes up roughly 70 percent of GDP, going forward.

Looking ahead, traders may see very choppy price action as soon as the markets open on Sunday in response to this weekend's Group of Seven (G7) meeting. A statement is likely to be released on Saturday, and comments from participating officials on Friday have suggested that currencies, and more specifically the US dollar, will be discussed. If the G7 statement hones in on concerns surrounding US dollar weakness, speculation about the potential for coordinated currency market intervention could arise, even though the chances of this coming to fruition are very small. Nevertheless, traders that have kept short-term positions open over the weekend should be wary when trading resumes.

On Monday at 10:00 ET the ISM non-manufacturing index is projected to rise for the sixth straight month in September to 50 from 48.4, which would be the highest reading since September 2008. With 50 being the point of neutrality, anything even slightly better than expected (50.1 or higher) would signal an expansion in business activity for the first time since August 2008. That said, a sharp improvement seems unlikely in light of the fact that the Conference Board's measure of consumer confidence slipped to 53.1 in September from 54.5, while the latest US NFP report showed that the services sector lost 147,000 jobs during the same period. Overall, it would likely take an index reading above 50 to elicit a strong reaction from the US dollar, though a surprise decline would provide equally choppy price action for the currency.

Related Article: Currency Market to Encounter Flurry of Rate Decisions from RBA, BOE, and ECB

Euro Up as Euro-zone Producer Prices Rise on Energy Costs The euro ended the day mostly higher against the majors, and fell only against the Canadian dollar and Swiss franc. Data was supportive of the currency as the Euro-zone's producer price index rose 0.4 percent in August, helping to push the year-over-year rate up to -7.5 percent from -8.4 percent. As usual, the shift was driven more by volatile energy costs than anything else, and excluding this factor, producer prices only rose 0.1 percent during the month. Overall, this dynamic is indicative of broader inflation pressures, as the negative CPI results for the region are due primarily to the sharp decline in commodity prices from a year ago. Event risk will be limited for the euro on Monday, with only final purchasing managers' index (PMI) readings due to be released. Euro-zone services PMI is not expected to be revised from the initial estimate of 50.6 in September, up from 49.9, and since 50 is the point of neutrality for the index, this would confirm the first sign of expansion in the sector since May 2008. However, since manufacturing PMI was revised up to 49.3 from 49.0 during this same period, the composite index is projected to be revised up to 50.9 from 50.8, indicating a slight expansion for the second straight month. All told, only surprising results should impact trade.

British Pound Down Despite Rise in UK House Prices The British pound was generally a laggard on Friday, gaining only against the Australian dollar and Japanese yen, despite some positive economic data. According to Nationwide Building Society, house prices in the UK rose for the fifth consecutive month in September, this time at a rate of 0.9 percent to £161,816, suggesting that the housing sector is slowly recovering. However, housing starts seem to remain weak as the purchasing managers' index (PMI) for the construction sector slipped to 46.7 in September from 47.7, signaling a contraction in activity. One area that has seen significant improvement recently is the services sector, as services PMI has held above 50 since May, and the September reading that is due to be released on Monday morning is projected to rise to a two-year high of 54.5 from 54.1. From a technical perspective, shorter-term GBPUSD charts have shown that price has held below a falling trendline at 1.5955 drawn from the September 22 highs, serving as a good line in the sand for trade going into next week.

Australian Dollar the Weakest of the Majors - RBA Rate Decision Due Next Tuesday The risk-sensitive Australian dollar took a beating on Friday and ended as the weakest of the majors as commodities and equities fell. The currency faces big event risk next week as the Reserve Bank of Australia (RBA) is anticipated to leave their cash rate target unchanged on Tuesday for the sixth straight month at 3.00 percent. However, the Australian dollar may only respond to a change in the bias of RBA Governor Glenn Stevens' monetary policy statement. As it stands, Credit Suisse Overnight Index Swaps (OIS) are pricing in a 22 percent chance of a 25 basis point rate hike during this upcoming meeting, and 175 basis points worth of hikes over the next 12 months, which is generally in line with what we've seen since early August.

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Written by: Terri Belkas, Currency Strategist for DailyFX.com E-mail: tbelkas@dailyfx.com