The US dollar posted its first positive day in seven yesterday against a basket of currencies, pushing back above its 200 day moving average, helped by a better than expected ADP employment report which saw 42k jobs added last month.

This was followed soon after by ISM non-manufacturing composite data for July which rose to 54.3, above market expectations.

As a precursor to Friday’s key payrolls data it was just what the dollar needed to help arrest the recent slide and prompt some short covering ahead of the employment numbers. However it will take more than a couple of positive data announcements to prevent further dollar losses in the short term and the hope is that Friday’s figures will provide that.

In the UK and Europe the two key central bank rate setting meetings aren’t expected to yield any big surprises with the Bank of England and the European Central Bank both expected to leave monetary policy unchanged, though the Bank of England meeting could well be an interesting affair given the current lack of consensus about rate levels amongst the members.

In Europe Trichet’s post meeting press conference will no doubt be scrutinised for his assessment of the European economic outlook given that the EU and IMF are due to disclose the latest assessment of the Greek economy.

In the meantime US weekly jobless claims are expected to be pretty much unchanged from last week at 455k, while US chain store sales for July should give some idea of whether US consumer sentiment has improved, with expectations of a rise of 3%.

EURUSD – having touched 1.3265 earlier this week in the forex spread betting market the single currency has run into a bit of a wall and is testing back towards the 1.3125 break-out level and 38.2% Fibonacci level. While the single currency is able to hold above this level we should see a rise towards the 1.3510 area which is the 50% retracement level of the 1.5145/1.1880 down move.

In the online spread betting market there is also interim trend line support around 1.3095 from the 1st July lows at 1.2190/00. Below this we also have support around the 1.2950 level a break of which would open a test towards the 1.2840/50 level.

GBPUSD – the 1.5860/70 area which is the 61.8% retracement level of the down move from 1.6880 to the May lows at 1.4230, is currently acting as support after the highs of 1.5970 early this week.

This area needs to hold for a move towards the 3rd February highs at 1.6070 and even higher towards 1.6280. A break below 1.5860/70 could well see a deeper correction towards the 1.5520/50 support area. Long term trend line support levels, remain around the 1.5400/10 area, from the June lows at 1.4350.

EURGBP – the euro currency spreads continues to hold below the 0.8315 neckline and remains on target to test the 0.8245 61.8% retracement level of the up move from 0.8065 to the 0.8520 double top. While it stays below the old neckline support around the 0.8315/20 level the euro should head towards the 0.8245 level, and back towards the lows at 0.8070.

A break and close above 0.8315/20 re-targets 0.8410

USDJPY – a sharp rebound from 85.33 has seen the US dollar rally back above the 86.25 level while behind that there is also selling interest around the 87.00 area.

The key support remains around last years lows at 84.80, a break of which would then look to target the 1995 lows below 80.00.

However, this spill over the 86.25 level could go as far as 87.00 without negating the lower dollar, stronger yen scenario. Furthermore while the dollar is unable to overcome the larger 88.00/10 level, the focus remains solidly on further yen gains in the short term.

By James Hughes, Market Analyst, CMC Markets.

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