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The US dollar will encounter one of its most market-moving pieces of data on Friday: non-farm payrolls (NFPs).

Risk appetite has been fairly strong, which has put the safe haven asset under pressure, but if NFPs or the unemployment rate prove to be worse than expected, investor sentiment could take a turn for the worst and provide a boost for low-yielding currencies.

What is the Market Expecting for March Non-Farm Payrolls?

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Arguments for Another Sharp Drop In Non-Farm Payrolls

1.The ADP private payrolls gauge reported its 14th straight drop, falling a record 742,000
2.Initial jobless claims, continuing claims continue to hit the highest levels since recordkeeping began in 1967
3.Challenger Job Cuts surged for the 13th consecutive month at a rate of 180.7% in March from a year ago
4.ISM Manufacturing employment gauge edges up from record low, but holds below 50 for 8th straight month
5.Conference Board's consumer sentiment edges up to 26.0, but remains 0.7 points from 1967 record low

Based on both a Bloomberg News poll of economists and a variety of leading indicators, Friday's release of US non-farm payrolls (NFPs) is likely to show job losses for the fifteenth straight month in March. At the time of writing, Bloomberg News was calling for NFPs to plunge by 660,000, but looking at the range of estimates, economists are anticipating that NFPs could fall anywhere between 525,000 and 750,000. Based on leading indicators like jobless claims, we expect that declines will be on the worse end of the scale and NFPs could fall by 700,000 or more. Meanwhile, something that is starting to garner even more attention is the unemployment rate, which is projected to hit 8.5 percent, the highest since November 1983.

The steady accumulation of job losses does not bode well for economic growth going forward, as falling incomes will only contribute to further contractions in personal spending. Since the start of the US recession in December 2007, per the National Bureau of Economic Research (NBER), the unemployment rate has climbed from 4.9 percent up to 8.1 percent in February 2009 while personal consumption has slowed from 1 percent in Q4 2007 down to -4.3 percent in Q4 2008, and Q1 2009 results may be even worse.

How Will the US Dollar React?

In preparation for trading this top event risk, we need to put it into the context of speculation and consider the impact this employment gauge could have in altering expectations for growth in the US compared to its global counterparts. The more important for forex market price action, though, is that fundamental US data does not tend to have a logical impact on the currency. Instead, risk trends remain in the driver's seat so traders must consider the impact of NFPs on risk appetite. Indeed, if we see that NFPs fall more than expected or the unemployment rate climbs above 8.5 percent, the news could trigger losses in risky assets like stocks, trigger flight-to-safety, and thus, lift the US dollar, especially against high-yielding currencies like the Australian dollar but perhaps even the euro. On the flip side, if job losses and the unemployment rate don't climb quite as much as anticipated, the news could spark enough optimism to boost demand for stocks and forex carry trades, and subsequently lead the greenback lower.

From a technical perspective (see charts below), the daily charts of the US dollar index shows that the currency remains in an uptrend as price is above trendline support near 83.38. Even on a short-term scale (240-minute chart), price has been able to hold above intraday trendline support near 84.00. That said, if the US dollar index were to fall below 84.00, the move would signal a bearish break toward the March lows. On the other hand, if the index can stabilize near current levels, the safe haven could resume its uptrend.

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