Talking Points

  • U.S. Dollar: Non-Farm Payrolls Disappoint, Jobless Rate Contracts
  • Euro: Consolidates Within Bearish Formation - Greek, French Election In Focus
  • British Pound: To Consolidate Ahead Of BoE Interest Rate Decision

U.S. Dollar: Non-Farm Payrolls Disappoint, Jobless Rate Contracts

The greenback came under pressure following the dismal Non-Farm Payrolls report, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) paring the overnight advance to 9,922, and the reserve currency may consolidate throughout the North American trade as market participants increase bets for more monetary easing. Indeed, the world's largest economy added 115K jobs in April following the 154K expansion during the previous month, while the jobless rate unexpectedly slipped to 8.1% from 8.2% as discouraged workers continued to leave the labor force.

Moreover, wage growth slowed during the same period, with the annualized reading falling back to 1.8% from a revised 2.0%, and the slew of weaker-than-expected data may encourage the Fed to carry its easing cycle into the second-half of the year as policy makers look for a stronger recovery. However, as the central bank expects economic activity to gradually gather pace throughout 2012, Fed officials may continue to soften their dovish tone for monetary policy, and the FOMC may start to discuss a tentative exit strategy as growth and inflation picks up. As the USDOLLAR carves out a higher low in May, the short-term rebound in the index should continue to gather pace, and the greenback may continue to retrace the decline from the previous of month as central bank officials become increasingly upbeat towards the economy.

Euro: Consolidates Within Bearish Formation - Greek, French Election In Focus

The Euro snapped back following NFPs, with the EURUSD bouncing back from an overnight low of 1.3120, but we will stick with our bearish forecast for the single currency as the economic docket continues to cast a weakened outlook for the region. As the election in France and Greece come into focus, a shift in leadership may further drag on investor confidence, and we may see the single currency face additional headwinds in the week ahead as the threat for contagion continues to dampen the outlook for the region. As European policy makers struggle to address the risks surrounding the region, fears of a prolonged recession are likely to intensify in May, and we should see the bearish formation in the EURUSD continue to take shape as it carves out a series of lower highs. As price action approaches the apex of the descending triangle, we are looking for a major break to the downside, but the euro-dollar may continue to consolidate in the week ahead as it continues to find support around 1.3000.

British Pound: To Consolidate Ahead Of BoE Interest Rate Decision

The GBPUSD pared the decline to 1.6154 on the back of dollar weakness, but we are still looking for a short-term correction in the exchange rate as the relative strength index continues to come off of overbought territory. As the Bank of England is scheduled to meet next week, we should see the British Pound consolidate ahead of the rate decision, but the central bank may refrain from releasing a policy statement as the Monetary Policy Committee is widely expected to maintain its current policy stance in May. However, as BoE officials take note of the stickiness in underlying inflation, we may see a growing rift within the MPC, and the central bank may ultimately move away from its easing cycle in an effort to restore the credibility on its inflation mandate. Although our near-term bias remains to the upside, we want to see the GBPUSD find support around 1.6000 to see a move higher, and the sterling may mark fresh yearly highs later this month should the BoE Minutes due out on May 23 dampen speculation for more quantitative easing.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong