United States non-farm payrolls released Friday were highly awaited because they were being regarded as a point of consolidation for US economic growth - but there was a danger that the levels forecast were being set too high. In fact the actual figure managed to disappoint investors, even though at first glance the release showed a significant increase, because it fell short of targeted expectations.

US employers created 431,000 jobs in May - which was below the 513,000 predicted by analysts polled by Reuters. In addition to this shortfall a more detailed look at the data revealed that the jump in payrolls was largely attributed to government employment, whereas the private sector added merely 41,000 of the 431,000 gain.

This sent EUR/USD lower to 1.1955 on Friday evening breaking the 1.20 psychological levels, and as low as 1.1876 on Monday. Statements regarding Hungary's fiscal problems also increased the market's negativity. Early Tuesday morning the euro enjoyed some support as it regained the 1.1982 levels. This regained support came on Ben Bernanke's reassurance to the markets that US economic growth was still on track - which renewed some risk appetite for the markets. In fact major Asian indices closed in the green in the early Tuesday session.

After Friday's jobs report disappointed markets, analysts started asking how the US economy could survive now that half the stimulus money had been spent already, and if the government was no longer in a position to throw more cash at the economy. Could the US economy stand on its own feet unattended?

But soon enough economists from Barclays Capital investment bank raised forecasts of United States GDP growth; on the grounds that consumer spending should be rising more quickly than expected. Barclays Capital acknowledged a weaker than expected rise in private sector employment, but continued to say that cyclical recovery in labour market is gathering pace. Barclays Capital said that figures for retail sales and vehicle sales point towards growing consumer spending.

On Monday night eurozone countries agreed on the latest details of the €440 billion bailout package now termed as the European Financial Stabilisation Fund. It is meant to be structured as a Special Purpose Vehicle. A generic definition of Special Purpose Vehicle explains that it is essentially an "independent vehicle administered by professional bodies to ensure there is no connection with the sponsors".

Operations of the SPV are usually "limited to the acquisition and financing of specific assets" with specific or temporary objectives. The SPV is "usually a subsidiary entity with an asset/liability structure and legal status that makes its obligations secure even if the parent company" (or in this case nation) "goes bankrupt". These SPVs are mainly used to isolate financial risk.

Despite this EFSF does not come as a new announcement, it provides a structure to the previously announced programme. A major area of discussion during Monday's discussions was the role national parliaments ought to have should the fund be activated. In this regard Germany, Austria, Finland and the Netherlands have opted to give up on requiring their respective national parliaments to vote if the SPV makes any loans. Economists are viewing this as pushing the eurozone closer to a fiscal union.

Eurozone ministers also planned to authorise the creation of a cash reserve to provide a cash buffer for the operation of the EFSF (when any loans are made). Even an upgrade of the Sstability pact has been agreed upon which mainly includes the presentation of national budgetary plans to the commission, earlier sanctions (if debt rises too fast or if the three per cent threshold is trespassed), and the monitoring of competitiveness indicators as part of the fiscal analysis.

In the United Kingdom, focus is on the upcoming budget on June 22. The government is seen as attempting to prepare the British for what lies ahead in the upcoming budget and has quoted Canadian-style fiscal consolidation as a lead to follow. Fiscal consolidation should be supportive of the British pound in the long run. Earlier on this week rating agency Fitch commented on the need for the United Kingdom to adopt more ambitious deficit cutting plans and called the country's fiscal challenge as 'formidable' - the UK government later announced it was in agreement with Fitch's comments.

It is interesting to note that according to Stephen Roach (chairman at Morgan Stanley, Asia) China shall be unveiling, in early 2011, plans for a five year project to boost consumption domestically. Fears of dwindling demand from developed western countries have pushed China to look for consumption internally. Such a project is expected to bring about major changes for the country, especially considering that economists have been describing China as a country limiting the trickling of wealth to the different levels of society.

RTFX Ltd ("RTFX") is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.

This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.

They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employees.

Upcoming FX Key events

Today: BOE and ECB Rate Decision and US Trade Balance.

Tomorrow: US Advanced Retail Sales and University of Michigan Confidence, French CPI and UK PPI.

FX Technical Key points

EUR/USD is bearish, target 1.1650, key reversal point 1.2450.
USD/JPY is bullish, target 98, key reversal point 85.
GBP/USD is bearish, target 1.4000, key reversal point 1.5000.
USD/CHF is bullish, target 1.2000, key reversal point 1.1000.
AUD/USD is bearish, target 0.7800, key reversal point 0.9000.
NZD/USD is bearish, target 0.6200, key reversal point 0.7150.

Mr Bovay is senior trader at RTFX Ltd.

www.rtfx.com

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