Euro Looks Toward Non-Farm Payrolls Report

10/06/2010 12:01 am EST

Focus: FOREX

The EUR/USD showed weakness for the first time in a week as global growth concerns have weighed on risk appetite, threatening the current three-week rally. The pair has seen its direction tied to risk sentiment with its correlation strengthening to 65% from 45% a month ago. However, we were starting to see some divergence on a shorter-term perspective with euro gains outpacing stocks.

The prospect of additional stimulus from the Fed has both weighed the dollar and generated demand for stocks, making the course of Fed monetary policy more important than the numbers dictate. Therefore, the upcoming US non-farm payrolls report could be the biggest market-moving event, despite an European Central Bank (ECB) rate decision on the docket as well. Indeed, ECB yield expectations have seen their influence decrease to 40% from 51% a week ago. Technical resistance lies ahead at 1.3892 in the form of the golden ratio, signaling a potential end to the rally unless a fundamental catalyst emerges.

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The ECB will meet this week to determine future monetary policy with expectations that they will remain on hold and continue their prevailing rhetoric that risks remain balanced. The central bank meeting may be the quietest of the four scheduled this week, with the Bank of Japan (BoJ), Bank of England (BoE), and Reserve Bank of Australia (RBA) more likely to alter policy. However, traders shouldn’t overlook the post release statements, as ECB president Trichet could surprise.

The head monetary authority recently commented that although inflation is expected to remain near target levels, the risks are to the upside. We could see the groundwork start to be laid for an early 2011 rate hike. Recent growth concerns and continuing downgrades of European sovereign debt make tightening in the near term unlikely, but considering the central bank’s price stability mandate, it remains a possibility. Markets don’t agree as the overnight index swaps are now only pricing in 26.4 bps in tightening over the next year.

By John Rivera, currency analyst,

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