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Dollar clawing back some losses in front of Non-farm Payrolls

Market Overview
The dollar has come under pressure in the first week of 2017 as downside pressure on Treasury yields and measures to curb yuan weakness in China have driven some profit taking on some of the recent gains. This dollar weakness has been seen across the forex majors and on commodity prices too. There has been an interesting breakdown in the 2s/10s spread on US Treasury yields which is back below 120 basis points for the first time in almost two months, a move that has added corrective pressure on the dollar. However the early morning moves have been positive for the dollar as it is clawing back losses with traders looking to position ahead of Non-farm Payrolls. Traditionally in front of Non-farm Payrolls, markets will begin to consolidate, so the early dollar gains today could be an element of that. However, after the ADP employment change came with a slightly negative surprise and it will be interesting to see if this is a sign of a weaker payrolls report, which would see the dollar coming under further pressure.
Wall Street closed lower with the S&P 500 off by 0.1% at 2269, whilst Asian markets were also mixed to lower and the consolidation in the European markets that has been a feature of early trading in 2017 is continuing early today. In forex markets the dollar has had a modest rebound against most of the majors, although the rally against the yen is more pronounced. Gold and silver are lower with the dollar strength and are unwinding some of yesterday’s gains. The oil price is mildly weaker by around -0.2% today.
The US Employment Situation report (released at 1330GMT) will dominate traders’ focus for the day. The headline Non-farm Payrolls are expected to stay at last month’s reading of 178,000, however if the ADP Employment change yesterday is anything to go by then a small miss could be anticipated. The other factors in the report will also be watched with unemployment expected to tick mildly higher to 4.7% (from 4.6%), whilst average hourly earnings are expected to grow by +0.3% for the month which would be a welcome improvement following last month’s -0.1% decline, whilst also helping to pull the year on year back up towards +2.7%. Traders will also be watching the laborforce participation rate which has fallen for the past two months to 62.7, whilst the U6 unemployment at 9.3% last month still seems to have some slack to get back to the levels averaging through 2006/2007 where it was around 8.3%.

Chart of the Day – EUR/JPY
A breakdown on EUR/JPY would certainly be a concern for the market bulls as the yen weakness over the past couple of months has been a feature of the improvement in risk appetite. However the negative candles are stacking up now and this is weighing on the momentum indicators. The RSI yesterday pulled back to a two month low which suggests that pressure is mounting on the support. The long term breakout above 122.00 was a key bull move, but the market has since been consolidating sideways for the past four weeks and the support is coming under pressure. If the momentum indicators continue to deteriorate, the support at 122.00 will come under pressure and then the late December support at 121.55 would be on the radar. A breach of 121.55 would complete a small top pattern and imply 250 pips of correction. This would seem to be a near term correction but a breach of support at 120.85 would open support back at 118.45. The intraday hourly chart shows the early morning rally but there is a sequence of lower highs and the resistance around 123.15/123.30 will be worth watching today. A negative payrolls report today would strengthen the yen and could drive a breakdown.

Read the full article and check out today's charts here:

Friday, 06 Jan, 2017 / 8:40

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