ADP Employer Services gauge showed a shocking -693K contraction in employment versus estimates of -495K in job losses. The news sent the dollar tumbling against euro with the pair hitting 1.3737 in post release trade. The ADP figures confirmed the dollar bears worst nightmare nearly hitting the -700K barrier suggesting that the US labor situation has deteriorated significantly over the past month.

The U.S. dollar has ended the week lower against all higher yielding currencies as the actions by Washington and leaders of the 20 largest economies have helped to restore risk appetite. USD/JPY which tracks the market’s sentiment broke 100, to trade at the highest level since November. The fate of the dollar in the week ahead will be largely dependent upon whether we are at a turning point in the global recession or if investors have been misled by false expectations.

USD/JPY took out the key 100 level mark on a stop fueled rally in Asian session while cable ran through the 1.4800 figure in a lively pre-NFP action as currency markets prepared to end a volatile week of trade. In Asia very aggressive buying from option related accounts knocked out the 100 barrier in the pair backed by continuation of risk appetite in the afterglow of the successful G-20 summit.

The rally in U.S. equities and the improvement in risk appetite drove the U.S. dollar lower against all higher yielding currencies. Thanks to some extra efforts by the G20 and relaxation of mark to market accounting by the Financial Accounting Standards Board (FASB), investors have become more optimistic. However a big event risk lies ahead for the U.S. dollar and it remains to be seen whether the positive sentiment following the G20 and FASB can be sustained. The non-farm payrolls report is traditionally one of the most market moving pieces of data for the foreign exchange market and with the strong possibility of another sharp decline in jobs, it is too early to completely buy into the recovery story (How Could the Dollar React to Non-Farm Payrolls?).

A total of 651k jobs were cut by US corporations in the month of February. Since January 2008, more than 4.2 million Americans have lost their jobs. This represent a rebound from the previous month but only a very mild one after another 57k jobs cuts were tacked onto the January data. With the downward revision, January represented the single worst month for the labor market since 1945.

As we have promised, trading currencies have become more interesting following the interest rate decisions in Europe. The next 24 hours should prove to be just as exciting for forex traders with the February non-farm payrolls report due for release. The US dollar has rallied significantly ahead of the payrolls report, which is traditionally the single most market moving economic data for the EUR/USD. The cohesive rally in the US dollar and the price of gold along with the sell-off in US equities indicate that risk aversion is the main theme of the day. This also provides a clue on how the dollar could trade following Friday’s non-farm payrolls report (February Non-Farm Payrolls Preview).

This morning, the Bureau of Labor Statistics reported that January was another month of massive job losses. For the third time in a row, more than 500k Americans lost their jobs. The market was looking for payrolls to drop by 540k, but instead they fell by a whopping 598k (Instant Insight on January Non-Farm Payrolls). Yet, currencies and equities traded like non-farm payrolls increased rather than decreased but this baffling response to a very negative number can be easily explained by the prospect of help from Washington.

EUR/USD managed to stage a mild rebound in Asian and early European session today, bouncing above the 1.2800 handle after selling off yesterday on disappointment at ECB’s inflexibility on interest rates. The euro rally, however was capped by news that German GDP would print worse than expected at -2.0% versus forecast of a -1.8% contraction. Nevertheless, the downside revision could hardly be considered a surprise to the market given the horrid series of economic data emanating from Germany all week long and the focus is likely to shift to the US NFP report due 13:30 GMT

On Friday, the Bureau of Labor Statistics is expected to tell us that US employers fired another 500k people in the month of January. Surprisingly enough currencies and equities are trading higher ahead of the non-farm payrolls report which suggests that traders are not afraid of a bad number. Everyone knows that the US economy is very weak and major job losses will continue. Since traders are becoming immune to bad data, it may take job losses in the area of 600k to spook them (January Non-Farm Payrolls Preview). Instead, traders are looking beyond Friday’s non-farm payrolls report to the Monday, February 9th speech by US Treasury Secretary Timothy Geithner. According to a Treasury official, Geithner is expected to unveil a bank rescue plan next week. This is one of the few things that could strike a meaningful recovery in the currency and equity markets. If traders deem Geithner’s plan as satisfactory, we could see a further recovery in the financial markets despite the fact that the US economy will get worse before it gets better.

Friday’s Non-Farm Payrolls report should continue the persistent and debilitating losses that are the hallmark of a recession. We are destined to see the thirteenth month of mounting job losses that is prone to sever the US’ ability to pull out of the economic crisis and restore some level confidence and activity. However, this is not to say that there are no reasons to be modestly optimistic about the labor market report. In fact, currencies and equities are already pricing in the possibility of another 500k decline in non-farm payrolls. The bar has been set very low and in order to disappoint the markets, payrolls may need to fall by 600k.

The US service sector has contracted for the fourth consecutive month but the pace of contraction is slowing. Although this appears to be a global trend, we expect the improvement to represent only a temporary stabilization in the service sector.

The US dollar traded lower today as safe haven demand subsided. New fiscal stimulus has been announced in Australia and Japan leading US investors to hope that similar help is around the corner. The full Senate is expected to vote on the $885 billion stimulus package this week and the prospect of a swift approval is having a big impact on the currency market. Politics is overshadowing economics and in that same vein, any delays in getting the money into the hands of Americans could derail the greenback.

UK manufacturing plummeted by -2.9% against forecast of only -0.5% dragging pound lower in early London trade, but the unit managed to recover most of its post news release losses as focus shifted to the US Non Farm payroll report due later today at 13:30 GMT. Part of the reason for currency market’s rather nonchalant reaction to the worst UK manufacturing reading since 1981 may have to do with the fact that the manufacturing sector comprises a relatively modest percentage of the UK economy which is much more service oriented than the large economies of the Eurozone.

The US dollar is selling off aggressively ahead of Friday’s non-farm payrolls report on the fear that for the second month in a row, job losses may have topped 500k. The recent moves in the currency and equity markets suggest that everyone expects a very weak labor market report. Although the consensus forecast is -520k, the whisper number is closer to -650k to -700k. Sentiment is strongly skewed in one direction which can be dangerous considering the fact that some of the leading indicators for non-farm payrolls call for a rebound. The Non-farm payrolls report is the most market moving release for the currency market and it should live up to its volatility inducing reputation.