European unemployment set to increase again, ahead of US NFP

Having enjoyed a strong January European stocks ended last month on a sour note as investors booked gains on rising concerns about growth prospects in the months ahead in the US, as well as Europe.

With those concerns in mind attention will return once again to Europe's economic malaise and the festering sore of record unemployment in the euro area, as well as the final January manufacturing PMI numbers Spain, Italy, France, Germany and the euro area.

While there have been encouraging signs of a stabilisation in manufacturing activity in Spain, Italy and Germany, over the past month levels of activity are still set to remain in contraction territory at 45.5, 47.6 and 48.8 respectively. Of greater concern to Europe's politicians has been the sharp drop in French activity, which is set to be confirmed at 42.9.

The broader European measure is set to come in at 47.5, contrasting with the UK manufacturing sector which is expected to expand with a reading of 51.

While manufacturing activity remains a concern, of greater concern is the continued rise in European unemployment levels and this isn't set to show any improvement at all, with further rises expected.

Italian unemployment is set to increase from 11.1% to 11.3%, while the broader European measure is set to rise to a new record of 11.9%, from 11.8%.

In contrast the situation in the US does still appear to be showing signs of improvement despite this weeks disappointing Q4 GDP number.

The key question here will be whether or not the very late compromise on the fiscal cliff deal at the beginning of January prompted any pick up in hiring and economic activity.

Early indications would suggest not, but as with this week's surprise GDP numbers, there is plenty of room for error.

This weeks ADP number pointed to continued slow improvement in the US labour market, while recent sharp falls in the weekly jobless claims could see today's January jobs report spring a surprise.

Expectations are for 158k new jobs to be added, pretty much the same level as the December numbers, though we could see some revisions in that number, while the unemployment rate is expected to stay at 7.8%.

The latest manufacturing ISM data is expected to come in around the same levels as December's 50.7 reading.

EURUSD – we continue to hold above the 200 week MA at 1.3530, which appears to be acting as support for now, and if we end the week above it, then we could well see a move towards 1.3835, the 61.8% retracement level of the 1.4940/1.2045 down move. Pullbacks should find support at 1.3400, while below that we have the 1.3250 level the January lows. The long term support line from the 1.2045 lows now comes in at 1.3100 which remains the key level on the downside. .

GBPUSD – the break above 1.5830 has indeed seen a push higher, however the pound needs to push back beyond the 200 day MA at 1.5910 to stabilise and this remains the larger resistance. The key supports remain at 1.5680 the 61.8% retracement of the 1.5270/1.6380 up move. There is also long term trend line support at 1.5630 from the 2009 lows at 1.3500, a break of which opens up the 2 year range lows at 1.5270.

EURGBP – the trend line resistance level at 0.8605 from the 0.9805 highs continues to cap the euro gains so far. A break of 0.8605 has the potential to target the 0.8700 area. The 0.8525 level should now act as support on any pullbacks, with a push below re-targeting the 0.8425 area. Long term trend line support at 0.8115 comes in from the 0.7755 lows.

USDJPY – the US dollar continues to remain underpinned as it continues to hold above support at 90.30 on course for the 92.50 level initially and long term target at 94.00
Only below 90.30 argues a steeper fall towards key support at 87.50.