As my good friend Andy Busch put it, the NFPs on Friday were like Chicago weather. After you’ve experienced 10 degrees (Fahrenheit) 25 degrees doesn’t seem so cold. At -524K the US jobless data was horrible but against expectations of an even uglier -700K number, Friday’s report looked like a win. After struggling for a few minutes to make up its mind, the EUR/USD plunged like a stone closing the day down more than 300 points off its highs.

Dollar’s rally was in no way a vote of confidence on the US economy which continues to crater as unemployment increases and consumer demand falls off the cliff, but rather simply a referendum on who sucks less in the currency market at the present time. Although the US employment situation is grave, the news from the Eurozone was hardly any better as we wrote on Wednesday, “unemployment in EZ largest economy rose for the first time in 3 years by a greater than expected 18K jobs. Today’s data point is the first clear evidence of a trend change in German labor market conditions, suggesting that further job losses are on the way as 2009 unfolds. The news is likely to confirm market expectations of a 50bp cut from ECB next week and should the labor situation deteriorate further, it will no doubt lead to additional interest rate cuts as the year progresses. We have argued ad nausea that ECB monetary policy in 2009 will be driven by the conditions in the German labor market and we continue to believe that this will be the primary negative factor on the euro this year.”

However the question remains - will ECB budge? Next Thursday Mr. Trichet and company hold their monthly interest rate meeting and market expectations are rather muted. At best most market participants expect only a 25bp cut from ECB, but chances are good that Mr. Truchet may hold his ground an simply leave rates unchanged. Although this will no doubt only aggravate the economic situation in the EZ and could result in the region’ unemployment rate climbing back up to double digits it may nevertheless serve a short term catalyst for a EURUSD rally. If euro’s rates are unchanged it will remain the only G-4 currency to yield better than 2%, but Mr. Trichet’s intransigence could cost him dearly in the long run.

Despite EZ massive interest rate advantage last weeks auction of German Bunds went off horribly in comparison to the auction of US Treasuries - a clear indication that the msrket believes that the tight monetary policies of ECB are unsustainable. Therefore the pair appears to be trapped in the 1.3300-1.3800 range for the time being as traders are left to look for any signs of stabilization on either side of the Atlantic.

Boris Schlossberg serves as director of currency research at GFT, and runs bktraderfx.com.