Dukascopy Bank SA

Previous session overview
On Friday, all attention in the FX market market were on the US payrolls report. After the poor ISM release earlier last week, the payrolls again disappointed as only a meager 18K new jobs were created in the US in December. The unemployment rate even spiked higher from 4.7% to 5.0%. The market reaction was straightforward. 

EUR/USD spiked above the 1.48 mark after the release. A better than expected ISM non-manufacturing brought some relief but of course was not able to erase the flaring up of recession fears after the dismal payrolls report. Nevertheless, the greenback losses should be considered as rather moderate and this morning the EUR/USD pair is already back in the 1.4730 area, not that far away from the levels going into last week's US payrolls report. 

Also in USD/JPY, the payrolls initially triggered quite some additional dollar losses. US recession fears and quite a sharp decline in stock markets worldwide triggered a new wave of USD/JPY selling.

Separately, the U.K. pound notched to lower ranges Friday, but is slightly stronger on the day after a report on the U.K.'s dominant services sector showed a pickup in December. Analysts said this reduces the likelihood that the Bank of England will cut its key interest rate again next week.

Elsewhere, the Canadian dollar ended down sharply, falling to two-week lows after Canadian and U.S. economic data releases raised fresh concerns about the health of the North American economy. Late afternoon Friday, USD/CAD was trading at 1.0009 from 0.9876 at 1300 GMT and 0.9911 late Thursday. The Canadian dollar logged the bulk of its losses in the immediate aftermath of news that Canada's Ivey Purchasing Managers' Index for December fell significantly short of expectations with a 45.9 reading, suggesting contracting activity at manufacturers.

Market expectation
On the back of recent weak economical data, it's expacted that the ECB may start cutting rates as soon as March in spite of recent hawkish comments. Ahead of Thursday's ECB meeting, investors think that the downside, especially in short-term yields, will be somewhat better protected as Trichet may still sound rather hawkish in the face of recent elevated inflation data. As such, a buy on dips approach is preferred this week.