The market has big hopes for tomorrow's non-farm payrolls release.  After being grossly disappointed last month, analysts are once again aiming for the sky.  The current forecast is for 250,000 new jobs to have been created last month.  Most of the loftier expectations stems from the sheer disappointment that only 108,000 jobs were created back in December.  This has tempted economists to push forward their expectations for strong job growth to the month of January.    With a track record of under forecasting payrolls seven out of the past 12 months and over forecasting payrolls for the remaining five months by an average of 50k, we ask the same question we ask every month, which is - Will they be right?

What is the market forecasting for the month of January?

Change in Non-farm Payrolls: +250k (previous 108k)
Unemployment Rate: 4.9%  (previous  4.9%)
Change in Manufacturing Payrolls: 8k  (previous 18k)
Average Hourly Earnings MoM:  0.3%  (previous 0.3%)
Average Weekly Hours: 33.8    (previous: 33.7)

Of the 75 economists surveyed by Bloomberg, the range of forecast extends from a low of 175k to a high of 350k.  As indicated, even the most pessimistic analyst surveyed expects solid job growth and they seem to agree on the reason why:

Warm Weather - Warmer weather always makes people happy and a surprisingly warm January after a bitter cold December is expected be one of the primary reasons why job growth last month may have been particularly healthy. Yesterday's stronger than expected construction spending growth for the month of December could be the first sign that the construction sector is indeed holding on strong which means that warmer weather could help to boost employment in the construction sector even further.   

Fed's Beige Book Shows Continued Optimism - According to the Beige Book released on January 18, most of the Fed districts reported that there are signs of increasing employment and even though the labor market appears to be tight, regions such as New York, Chicago and Dallas reported wage increases. 

Consumers are Happy - Consumer confidence increased for the third consecutive month to the highest level in 3 1/2 years.  Such a jubilant attitude towards the economy is sure to entail a feeling that jobs are secure and plentiful.  It appears that rising energy prices and higher mortgage costs has done little to set back confidence.  In fact the percentage of people surveyed who felt that jobs were hard to find actually fell to the lowest level since October 2001. 

Jobless Claims Improving - Probably the single most convincing reason of why payrolls could be strong tomorrow is jobless claims.  Aside from the first week in January, jobless claims were consistently below 300k.  In fact, claims for the week ending January 28 fell by 11,000 to 273,000, pushing the four week average to the lowest level since June 2000.  Continuing jobless claims also fell to the lowest level since February 2001, all of which point could confirm that the country created a quarter of a million jobs last month.  Outplacement firm Challenger Gray & Christmas also reported a 4% drop in corporate layoff announcements between December and January.

So Given the Lofty Consensus Expectation, What is the Risk for the Dollar?

The market has already priced in the possibility of a March 28 rate hike, which means that a strong number should only boost the US dollar modestly since an additional rate hike to 5.00% in May at this point is a bit far fetched.  This means that even though we would see a dollar rally on a 250k plus number, depending upon the size of the surprise, the sell-off in the EUR/USD could be limited to 1.1970.  Alternatively, the market's expectation is tipped so deep to favor of a strong release that if payrolls come out below 175k, we could easily see the EUR/USD rally back above its 200-day SMA resistance at 1.2150.

Kathy Lien is the Chief Currency Strategist at FXCM.