Improved Non-Farm Payrolls Driving U.S. Dollar Higher

The U.S. Dollar is mounting a strong rally thismorning against most major currencies in reaction to a slightly better thanexpected March Non-Farm Payrolls Report.

The U.S. Dollar is mounting a strong rally this morningagainst most major currencies in reaction to a slightly better than expectedMarch Non-Farm Payrolls Report. The actual number showed an increase of216,000. The March Unemployment Rate at 8.8% was the lowest in 2 years. Whilethese numbers are encouraging, they aren’t strong enough to change the courseof the Fed which is likely to maintain its quantitative easing program until itexpires in June.

With the European Central Bank expected to begin raisingrates at its next meeting on April 7, there had been some talk that the Fed wasstrongly considering ending its QE2 program early due to improving conditions.A couple of Fed officials were also quoted as saying they were going to votefor a rate hike at the next meeting and that they saw no need for furtherstimulus. Look for the Fed to maintain its QE2 program in order to maintaincredibility with the investing community. This means that despite an improvingeconomy, the Fed is not expected to consider raising rates until at least Julyand most likely until after the end of the year.

Surging oil and food prices are going to continue to raiseconcern with the Fed. Although they strip out energy and food in their officialinflation reading, the Fed has to be watching crude oil and corn prices. Mostanalysts feel that the Fed is not likely to be concerned about the price ofcrude oil until it reaches $140 per barrel. At that level it is likely to triggerthe start of a double-dip recession.

So right now the Fed is caught between watching growth andthe price of oil. Growth has been steady but the economy still needs stimulusat least until June. Oil prices are not high enough to worry the Fed either.This means that they are likely to sit tight on monetary policy for the timebeing. Despite what the Fed says there is a strong feeling of inflation at thistime. An inflationary spike of 50 basis points or higher is going to mean theFed is going to have to begin acting early to curtail this rise or risk lettinginflation get out of control and having to boost rates more aggressively laterto stay ahead of the curve.

The key market to watch today is the Euro. On Thursday, theEuro was poised to breakout to the upside through the last main top at 1.4248as traders grew confident that the ECB was poised to raise its benchmarkinterest rates. However, short-sellers prevailed late Thursday after Irelandsaid that a new round of stress tests showed the nation’s hammered banks neededabout $34 billion in additional capital. This price move shows me that there isstill uncertainty about the ECB rate hike next week.

The question is how can traders go from focusing oninflation and calling for a rate hike to turning their focus once again to thebanking in problems in Irelandand slashing long positions. This morning’s weakness is understandable becauseof the better than expected U.S. Non-Farm Payrolls, but Thursday’s sell-off isstarting to look like a strong indication that investors still aren’t confidentthat the ECB will act accordingly to combat inflation while they are stillfooling around with bailing out weak banks.

This dilemma shifts the focus back to technical factors.Currently the Euro main trend is still up on the daily chart. The price actionthe past two day’s, however, suggests that a secondarylower top may be forming at 1.4232. This could be a sign that investors aregoing to go after the last swing bottom at1.4020. A move through this level will turn the main trend down on the dailychart.

Standing in the way of a complete washout of this market isa pair of uptrendingGann angles at 1.4108 to 1.4053. These two angles have been giving themarket direction and support for several weeks. A close below these anglescould trigger an acceleration to the downside so bullish traders will try todefend the Euro at both of these levels.

In conclusion, technical analysis is supporting the marketat this time but support is starting to wane. The fundamentals are confusingbecause it isn’t clear which side of the market the big money is committed to.Because of this, expect excessive volatility over the near-term.

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