US Non-Farm Payrolls (NOV) (13:30 GMT; 08:30 EST)
Expected: 80K
Previous: 166K

Unemployment Rate (NOV) (13:30 GMT; 08:30 EST)
Expected: 4.8%
Previous: 4.7%

How Will The Markets React?

One of the most market-moving indicators out of the US will be released on Friday, and with the FOMC rate decision and policy statement looming on the horizon next week, the forex, fixed income, and equity markets could see wild price action as traders price in rate expectations. The change in US non-farm payrolls for the month of November is anticipated to rise 80,000, down from 166,000 in October. However, this figure is notoriously difficult to handicap, which is why it tends to spark so much price action. Currently, there are risks to both the upside and downside for this release, as the ADP employment change and Challenger job cuts signal that conditions in the work force were relatively resilient. However, the ISM manufacturing and services reports both showed a drop in their employment components while the four-week moving average of initial jobless claims rose to the highest level since October 2005, suggesting that this week’s NFP figure could prove to be muted. Traders should also watch the unemployment rate, which rose to 4.727 percent in October (rounded to 4.7 percent, officially) – towards the top of the Federal Reserve’s recently revised forecast of 4.7 - 4.8 percent during the fourth quarter. This figure is anticipated to rise to 4.8 percent, but because of the use of the estimated figure, rather substantial changes in the rate may be clouded somewhat. Overall, Treasuries, the US dollar, and the Dow will respond more sharply to a surprising NFP read, as the unemployment rate will likely take a backseat to the headline news. Furthermore, the most severe reactions in the market will likely be if NFPs fall negative, as this will nearly assure traders that the Federal Reserve will indeed cut rates next week.

Bonds – 10-Year Treasury Note Futures

Treasuries have run straight into resistance at 114-10, which has managed to hold the contract back. However, upcoming event risk could push them higher once again as NFPs could prove disappointing, which may lead traders to ramp up speculation of a rate cut by the Federal Reserve next week. On the other hand, a stronger-than-expected figure could weigh Treasuries down towards 112-13.

FX – EUR/USD

Declines in the EUR/USD pair have broken below an ascending channel, but have run into support at the 23.6 percent retracement level of the rally from 1.336 – 1.497 at 1.4590. On Thursday, a consistently hawkish bias by ECB President Trichet has supported the pair, as upside inflation risks prevented the central bank from cutting rates. However, a focus on downside potential for growth stemming from the reappraisal of risk in the financial markets makes the Euro vulnerable to additional declines. On Friday, US NFPs will be released, and they are expected to rise 80,000 in November, down from 166,000 during the month prior. However, this figure is notoriously difficult to handicap and is prone to huge revisions, making it a major market-mover for the US dollar pairs. A weaker-than-expected reading could send EUR/USD rocketing towards 1.4750 once again, as traders increasingly bet that the FOMC will indeed cut rates next week. On the other hand, a surprisingly strong NFP report could help EUR/USD continue its descent towards 1.4350.

Equities – Dow Jones Industrial Average

The rebound in the Dow appears to have been stopped short at the 50 percent retracement level of the decline from 14,198.10 – 12,724.09 at 13,461, as the index has slowly pulled back. Dovish rhetoric from various FOMC members, rumors that an agreement has been made to freeze subprime mortgage interest rates, and ramped up expectations of a rate cut next week sparked most of the gains. Friday’s NFP report may not be very supportive of the Dow, as the figure is expected to ease to 80,000 from 166,000 and could actually be even weaker. While this would boost the case for more accommodative monetary policy by the Fed, the news would not bode well for the economy as a whole, especially as the risks of a recession are now being discussed regularly. Declines in the index may target support near 13,071/88. On the other hand, a better than expected figure could spark some mild gains, though the 100 SMA at 13,495 and the psychologically important 13,500 level are likely to continue to hold up as solid resistance.

Terri Belkas is a Currency Strategist at FXCM.