Forex: USD Struggles as NFPs Miss Forecast- Labor Force Expands

Talking Points

• U.S. Dollar: NFPs Falls Short of Forecast, Unemployment Tips Higher

• Euro: Banks to Repay EUR 3.5B of LTRO, Inflation Unexpectedly Lows

• British Pound: U.K. Manufacturing Expands at Slower Pace, All Eyes On BoE

U.S. Dollar: NFPs Falls Short of Forecast, Unemployment Tips Higher

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) continues to pare the overnight advance to 10,176 as U.S. Non-Farm Payrolls increased 157K in January amid market expectations for a 165K print, but we saw the jobless rate unexpectedly increase to 7.9% from 7.8% as discouraged workers returned to the labor force.

At same time, the November reading was revised higher to reflect a 196K rise in employment from an initial forecast of 155K, and the ongoing expansion in the participation may encourage the Federal Reserve to adopt a more positive outlook for the world’s largest economy as the recovery in the labor market gradually gather space. As the region gets on a more sustainable path, we should see a growing number of Fed officials scale back their willingness to expand the balance sheet further, and the Federal Open Market Committee (FOMC) remains well positioned to halt its easing cycle later this year as the outlook for growth and inflation improves.

Nevertheless, the ISM Manufacturing report on tap for later today is expected to show the gauge for business outputs holding steady at 50.7 in January, but a positive development may help to shore up the dollar as it dampens expectations for additional monetary support.

Euro: Banks to Repay EUR 3.5B of LTRO, Inflation Unexpectedly Lows

The Euro rallied to a fresh monthly high of 1.3674 as the European Central Bank (ECB) said commercial banks will repay EUR 3.5B of the funds made available through the Long-Term Refinancing Operations, but the bullish sentiment surrounding the single currency is likely to be short-lived amid the deepening recession in Europe.

Indeed, unemployment in the euro-area held at a record-high of 11.7% for the third consecutive month in December, while the headline reading for inflation unexpectedly ease to 2.0% in January from 2.2% the month prior. As the economic downturn threatens price stability, we should see the ECB continue to carry out its easing cycle in the months ahead, and the Governing Council may look to target the benchmark interest rate as price growth is expected to slip below the 2% target over the policy horizon.

At the same time, growing threats for a credit event in Cyprus should further dampen the appeal of the single currency as European policy makers maintain a reactionary approach in addressing the debt crisis, and the ECB may have little choice but to embark on further non-standard measures as the governments operating under the monetary system become increasingly reliant on external support.

Although the relative strength index on the EURUSD continues to reflect an overbought signal, the oscillator needs to fall back below the 70 figure to pave the way for a short-term correction, and we may see the single currency come under pressure going into the ECB interest rate decision on February 7 as the central bank retains a dovish tone for monetary policy.

British Pound: U.K. Manufacturing Expands at Slower Pace, All Eyes On BoE

The British Pound pared the advance from earlier this week as manufacturing in the U.K. grew at a slower pace, but we may see the sterling regain its footing ahead of the Bank of England (BoE) interest rate decision on tap for the following week as the central bank remains upbeat on the economy.

Although the BoE is widely expected to maintain its current policy in February, the central bank may strike an improved outlook for the region as the Funding for Lending scheme works its way through the real economy, and we should see the central bank switch gears in 2013 in an effort to stem the upside risk for inflation.

As the multi-year upward trendline in the GBPUSD continues to take shape, the pair looks poised for further advance ahead of the central bank meeting, and we will maintain a bullish outlook for the sterling as the BoE slowly moves away from its easing cycle.

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
USD	14:55	9:55	U. of Michigan Confidence (JAN F)	71.5	71.3
USD	15:00	10:00	Construction Spending (MoM) (DEC)	0.6%	-0.3%
USD	15:00	10:00	ISM Manufacturing (JAN)	50.5	50.7
USD	15:00	10:00	ISM Prices Paid (JAN)	56	55.5
EUR	17:00	12:00	Italian New Car Registrations (YoY) (JAN)		-22.5%
EUR	17:00	12:00	Italian Budget Balance (JAN)		14.1B
EUR	17:00	12:00	Italian Budget Balance (Year to date) (JAN)		-48.5B
USD	22:00	17:00	Total Vehicle Sales (JAN)	15.20M	15.30M
USD	22:00	17:00	Domestic Vehicle Sales (JAN)	11.99M	11.97M

--- Written by David Song, Currency Analyst

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

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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