Today's nonfarm payroll report came as a big surprise as it undershot forecasts sharply, in fact it was below the worst forecast out of a survey of analysts by Bloomberg.

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In the breakdown of the report we see that it was the services sector that saw steep drop-off in job gains with professional and business services and education and health services leading the softer pace of job gains.

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Implications of the NFP Report on Dollar and Markets:

The implications for this report are twofold.

First, it signals that US economic momentum is likely slowing. If the US economy joins Europe and China in posting weaker growth, that is a negative for the growth outlook for the global economy and would undermine investor sentiment - meaning weaker equities and commodities ahead. That risk off sentiment should favor the USD and JPY, as well as safe haven bonds in the US, Germany, and the UK.

Second, is that a weakening US labor market is one of the conditions cited by the FOMC in their considerations of whether to do more monetary stimulus or not. Today's report certainly bolsters the case of that doves on the Fed committee, especially if it's coupled with weaker fundamental reports in the weeks to come. Therefore, we want to closely monitor the comments of Fed officials over the next few weeks as well as see how the market prices expectations around QE3. If market participants, after pricing out QE3 earlier this week price it back in the following weeks that is a USD negative.

This creates opposing factors on the USD as fundamentals argue for a stronger dollar while the sentiment/Fed liquidity side of things argue for a weaker USD. Because of the large miss I believe fundamentals will dominate and create the conditions for a stronger pullback in equities which should help the USD against higher-yielding rivals like the EUR, GBP, AUD, NZD, and CAD.

If instead market participants latch onto the prospect of more easing by the Fed, and equities and commodities rally as a result, then that picture for a stronger USD becomes less attractive. Therefore, how soon can this transition from weaker fundamentals/sentiment to heightened expectation of more Fed liquidity and therefore a weaker USD takes place remains to be seen.

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The dollar index for instance retreated today, but not by much, and with most of the world on holiday will need to see how the reaction will be early on next week to judge. One scenario could be that the index gets trapped in its trading range established during March with a high at 80.70 and a low near 78.70 and 78.10 below that.

Therefore today's NFP alters the fundamental backdrop I had coming into that release where I argued that continued momentum in the US labor market would lessen the chance of QE and therefore strengthen the US dollar.

See my NFP Preview: USD - Preview: NFP Should Give Further Support to Dollar

However, this report can still make the case for a stronger USD if it creates a pullback in equities.

I discussed that here: USD - Expecting Stronger Dollar As Equities Set to Pull Back From 2Q Rally

All in all, the big losers following this report are likely to be commodity currencies - which may be pressured if prices for commodities fall on global growth concerns - while the USD and JPY should gain from safe haven seeking behavior. That is until Bernanke pumps up the market once again with talk of more stimulus.

We will follow-up on these themes on Monday in our Market Intelligence Briefing.

Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to FXTimes.com - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.