Non-Farm Payrolls Report to Set Tone in Forex Market

The U.S. Dollar Index withstood another test of the low for the week at 74.31 and last week’s low at 74.27 on Thursday

The U.S. Dollar Index withstood another test of the low for the week at 74.31 and last week’s low at 74.27 on Thursday. The higher close was impressive, but this market is still lower for the week. Overnight action has been mixed but strong upside momentum could trigger a challenge of last week’s close at 75.04. If you want to be safe about the long-side, it is suggested that you wait until this market clears 75.66 before considering buying.

The U.S. Dollar traded in a relatively tight range against a basket of currencies overnight ahead of this morning’s U.S. employment report. Traders are looking for an improvement today from the November report. Guesses are for a job loss of “only” 125,000 and for the unemployment rate to hold steady at 10.2 percent. There is some debate as to whether this is the low for the unemployment rate. At this time the consensus agrees the rate will stay the same this month, but is likely to rise to 10.5 percent by the end of the first quarter 2010.

Ask most economists if the unemployment rate is a lagging or leading indicator, and they will tell you it lags the economy. At this time, I think traders are looking at the unemployment rate as a “pseudo” leading indicator. This is why I believe the Dollar will benefit the most from a better than expected figure.

Yesterday, the EUR USD rallied early in the session following the announcement from the European Central Bank that it would begin withdrawing its stimulus money from the Euro Zone economy, but backed-off last week’s high at 1.5144 when ECB President Trichet called for a stronger Dollar. This price remains the strongest resistance at this time. Weakness could push this market back to 1.4972.

The GBP USD is rallying ahead of this morning’s U.S. Non-Farm Payrolls Report. Traders are expecting a choppy, two-sided trade over the next few days as market participants adjust positions ahead of next week’s Bank of England meeting. Early calls are for interest rates to remain unchanged and for the BoE to maintain its asset-buyback plan. Yesterday, worries over a weakening economy helped to pressure the December British Pound, but there is still not enough evidence to say that a secondary lower top has been formed.

The USD JPY is trading in an inside range overnight with a slight bias to the downside. On Thursday, the Yen traded lower for a third straight day. Earlier in the week, the Bank of Japan announced another stimulus plan designed to promote economic growth. Pressure could be on this currency until December 17th when the BoJ holds its formal meeting. Traders are nervous about holding long positions because of the possibility of an intervention. Currently, this market is testing a major 50% price at 88.57. There could be a technical bounce to the downside from this level, but a failure to hold could trigger a further rally to 89.46.

The USD CAD is trading weaker ahead of this morning’s U.S. and Canadian Employment Reports, but it still remains inside of a key retracement zone at 1.0537 to 1.0459. Trichet’s call for a stronger Dollar helped pressure the December Canadian Dollar yesterday, but the most bearish influence came from lower equities and flat crude oil. Traders seem to be reluctant to rally the Canadian Dollar out of fear of action by the Bank of Canada to depress the currency.

The closing price reversal top was confirmed last night in the AUD USD but there was no follow-through selling. The current chart pattern suggests a break to .9133 to .9089 is likely if the downswing continues. The overnight move is likely short-covering ahead of today’s U.S. employment report. .9322 remains the main objective for bullish traders. A move through this price will turn the main trend back up on the daily chart and could trigger an acceleration to the upside.

Short-covering and profit-taking following yesterday’s late session sell-off is helping to boost the NZD USD. Resistance remains inside the retracement range of .7272 to .7332. Downtrending Gann angle resistance is at .7315. On the downside, the main objective following yesterday’s closing price reversal top is .7160 to .7128.