Non-Farm payrolls for the month of June increased by 121k with a 18k upward revision for the month of May.  Analysts have been too optimistic and proven wrong once again.  Although expectations going into the number were as high as 199k from the NFP derivatives auction this morning, the signal from the ISM employment reports have proved to be far more accurate than the ADP forecast.  As we said yesterday in our Daily Fundamentals, the last time we saw such weak employment numbers, payrolls came in at 38k vs a 250k forecast and this indeed appears to be a repeat of July 2004, albeit to a lesser degree. 

However the details of the number was not nearly as dollar bearish as the headline would suggest.  Most notable of all was the uptick in the average hourly earnings from 0.1 percent to 0.5 percent and the rebound in manufacturing payrolls from negative to positive.  This suggests that wage pressures are still prevalent in the US economy and may compel the Fed to consider raising rates in August by another 25 basis points.  Depending on how aggressive the ECB is in August, the EUR/USD could be contained in a 1.26-1.2950 range.  Also do not forget that Bernanke is giving his semi-annual testimony on the economy and monetary policy on July 19th, therefore dollar bears may hold off until they get clearer direction from the Fed Chief.  For the time being, EUR/USD strength predominates as the hawkish comments from the ECB press conference will reverberate through the market while the market awaits Bernanke's testimony.

Kathy Lien is the Chief Currency Strategist at FXCM.