03/07/2014: Trading oultook ahead of the US session

A day full to the brim with economic data can usually be expected to be associated with heightened volatility, however all seems to be fairly relaxed so far. The morning’s data releases have largely benefited the dollar which has continued on from yesterday’s recovery, with the Dollar Index jumping strongly in the past two days, as there has been a reversal of fortunes against the yen and the euro. Despite this though, risk appetite is reasonably positive moving into the key Non-farm Payrolls data, with equities showing strength, the VIX volatility Index in decline once more, whilst government bonds are trading lower. The gold price is under a big of near term pressure due to the strength of the dollar too.

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The Eurozone Services PMIs were broadly as expected with the regional data in line, as was the data out of Germany and France, while Italy beat expectations and Spain missed. This has meant a largely neutral morning for the euro. The slight miss on the UK services PMI has meant that Cable has dipped around 20 pips coming into the key data State-side this afternoon.

Non-farm Payrolls are the key focus for the dollar traders, with an expectation of 212,000 jobs, unemployment of 6.3% and an improvement in the average hourly wages of +0.2%. Focus will also be on the participation rate which could increase from 62.9% if the trend of people returning to the labor force continues this month. A strong employment report (including a 5th consecutive month of payrolls above 200,000) would be dollar positive. Positive payrolls are usually linked to positive equities too, but during a time in which the Fed is strting to think about the timing of the beginning of its tightening cycle (ie. the end of ultra-loose monetary policy that has been the driving force behind equity markets into new high ground), a definitive impact on equities is difficult to be certain on.

The prospect of a correction in Cable is increasing, and could be a highly volatile trade if the payrolls report impresses the market. GBP/USD is overbought and threatens a near term correction. A move below immediate support at $1.7130 would re-open $1.7100 and possibly a retreat into the support band $1.7000/$1.7060. EUR/USD has had little impact from the Eurozone services PMIs and continues to build support in the $1.3640/$1.3670 band. Dollar/Yen also remains firmly anchored above the old resistance at 101.80 and the outlook continues to improve with every passing hour.

In outlook for equities is also ever improving. The FTSE 100 has broken above key near term resistance at 6841  (a rally high from late June). This now re-opens the key highs between 6879/6895 as momentum indicators continue to improve. Furthermore, it is also interesting that the last few days has seen the performance relative to the DAX has also improved. This has been helped by the news that the Chinese manufacturing PMIs pointed towards and signs of an economic improvement, which benefits the mining stocks which have a weighting of around 12% on the FTSE 100. The DAX has also improved and is once again within striking distance of its all-time high at 10051. S&P 500 futures suggest a 2 point gain at the open (which is after Non-farm Payrolls and will of course be impacted by the data).

With the improvement in the dollar and the general improvement in appetite for risk, the gold price has been held down today. The support band around $1320 has held so far, but a breach would quickly open $1310 and more importantly the support at $1306 which is the key near term level.

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