The second week of the month is much less busy in terms of key macro-economic releases. Market participants will therefore be pricing in and digesting the host of news put out last week including a strange non-farm payroll report in which weather distortions in the headline number - gain of 36K jobs compared to 138K expected - undermined what was a good signal in that the unemployment rate dropped to a 9% from 9.4%.

Stronger employment data benefits that USD as it, along with inflation, are the main criteria for the Federal Reserve in assessing their current Quantitative Easing 2 policy. On Thursday, jobless claims data is expected to show 411K new claims, a figure that is in the lower part of our recent range in the indicator and would also be a positive sign that the labor market is healing. A fall below the 400K level would be USD positive.

width=479

Besides the jobless claims data, this week features testimony by Fed Chairman Bernanke in front of Congress on Wednesday and trade data on Friday. As I said, a much quieter week, but one in which we may see some direction as we have had our most important US release for the month in the non-farm payroll on Friday, and also data on personal spending, manufacturing and services all pointing to strong economic activity.

While the macro-economic fundamentals in the US show rather strong activity the Fed seems content to remain with its ultra loose monetary policy until economic growth is stronger than 3.5%, and there is a more significant decline in the unemployment rate, and higher expectations for inflation. Higher commodity prices can fuel the last item on that list, while we continue to take in the US employment data that has not met expectations in terms of job growth. For now, the USD is strengthening on the back of the better signs from the economy, even if monetary policy may not have shifted all that much, while Trichet tone on inflation undershot expectations. Therefore Bernanke's testimony in front of the Budget Committee may carry strong weight, considering how spare the US calendar is this week.

The EUR/USD pair topped off at 1.3850 in the middle of last week, after ECB President Trichet' press conference and statement following the ECB interest rate decision was more dovish than the market expected. Weaker German factory orders data - a 3.4% decline for December compared to the expected 1.5% decline - pressured the EUR/USD to start the week. The German economy has been the powerhouse behind the Euro-zone's growth, and if slows then the ECB may find less scope to hike interest rates. In any case we fell below the 1.3550 pivot (Friday's low) targetting further risk to the downside (1.3460 then 1.3370, then 1.3250).

For a technical look at EUR/USD check out today's FXTimes Technical Update: EUR/USD Should see a Correction Before Bearish Continuation.

EUR/USD