Talking Points

• Dollar Consolidates in Overnight Trade as Markets Await US Jobs Report
• Lower NFP Print May Stoke Risk Appetite on Rising Bets for QE3 Ahead

The US Dollar (ticker: USDollar)was little changed in overnight trade as markets consolidated ahead of the closely watched US Employment report due in the hours ahead. As we suspected yesterday, dovish commentary from Ben Bernanke yesterday had little lasting impact on the greenback in that it didn’t meaningfully advance the case for a third round of quantitative easing (QE3), essentially restating sentiments that were already priced in following last week’s FOMC policy announcement.

Looking ahead, all eyes are on the Nonfarm Payrolls figure in January’s US Employment data set. Consensus forecasts call for the economy to add 140,000 to mark a slowdown from the 200,000 increase recorded in December. The apparent deterioration ought to be taken with a degree of skepticism because there is an element of seasonality to the January NFP reading that tends to see it undershoot expectations both because of a BLS birth and death statistical adjustment as well as the unwinding of temporary labor accumulated through the December holiday season.

Still, the most significant take-away from the release is likely to be the market’s reaction to whatever figure crosses the wires rather than the final number itself. Assuming a slowdown, two scenarios are possible. On one hand, the markets can interpret a lower print as indicative of faltering momentum in the US recovery and sell risky assets including stocks as well as correlated currencies, leading the US Dollar higher against most of its counterparts on safe-haven demand. On the other, traders may view a weaker reading as bolstering the case for additional support from the Fed arriving in the near term, sending risky assets higher and weighing on the greenback. Needless to say, an upside surprise would generate the inverse of either of these scenarios.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com