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The US dollar has started May off on a weak note, trading just above key support versus many of the major currencies. However, US leading indicators for this Friday's non-farm payrolls (NFPs) suggest the results could be rather optimistic, providing potential for further dollar declines as traders will opt to buy up risky, higher-yielding currencies.

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

2009.05.07_NFP_1

Arguments for an Improvement In Non-Farm Payrolls

1.Initial jobless claims have gradually backed off from the March 27 high of 674K down to 601K
2.ADP employment change fell less than expected by 491,000, the least since October 2008.
3.Challenger job cuts rose by 47 percent from a year ago, the smallest increase since September 2008
4.ISM services, manufacturing employment indices are still well below 50, but both have improved slightly
5.Conference Board, University of Michigan consumer confidence both surged in April

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 sixteenth straight month in April, but the rate of decline is anticipated to slow. At the time of writing, Bloomberg News was calling for NFPs to plunge by 600,000, but looking at the range of estimates, economists are anticipating that NFPs could fall anywhere between 360,000 and 750,000. Based on the improvements we've seen in leading indicators like initial jobless claims, consumer confidence, and the employment components of ISM non-manufacturing and ISM manufacturing, we expect that NFPs may drop somewhere in the range of 500,000 to 600,000.

That said, the steady accumulation of job losses does not bode well for economic growth going forward and indicates that the unemployment rate will continue to climb. In fact, for the April reading of the rate is projected to rise to 8.9 percent, the highest since September 1983, from 8.5 percent. At the same time, initial estimates of Q1 GDP for the US showed a 2.2 percent jump in personal consumption, after spending contracted for the previous two quarters, suggesting that aggressive discounting by retailers has been able to counter the impact of falling incomes, to a certain degree. In coming months, it will be important to get a sense if the rising optimism amongst consumers - which has been focused more on the economic outlook than current conditions - can remain robust even if growth doesn't bounce back in the second half of the year.

How Will the US Dollar React?

In preparation for trading this top event risk, we need to put it into the context of everything else that is going on in the markets since there is so much happening. This morning, the Bank of England announced that they were expanding their quantitative easing efforts, the European Central Bank cut rates to 1.00 percent and announced a 60 billion euro credit easing program, and at 17:00 ET tonight, the US government will release the official results of their stress tests on the 19 largest US financial institutions. Since the stress test news has potential to determine price trends for risky assets, including equities and FX carry trades, Friday's price action may trade more on the sentiment stoked in response to the results rather than the release of NFPs.

From a technical perspective (see charts below), the daily charts of the US dollar index shows that the currency is going to face major support at the confluence of the 200 SMA and a rising trendline at 83.13. Meanwhile, shorter-term charts of EUR/USD (240-minute chart) show that the pair has had trouble pushing above 1.3400, and there is additional resistance looming at 1.3486 (200 SMA on daily charts) and the psychologically important 1.3500 mark. As a result, it will be important to watch how the US dollar responds to these pivotal levels, as a breakdown in the greenback would signal a significant bearish turn in the currency across the majors. On the other hand, a failure and subsequent retracement could indicate that the US dollar is due for a broad rebound.

Questions? Comments? E-mail: tbelkas@dailyfx.com