The combination of a negative surprise from ADP, a disappointing Chicago PMI and talk of MSCI rejig has encouraged the market to extend the short-covering rally in the euro, sterling and Swiss francs. With the fiscal year end repatriation completed, the yen has been under pressure and remains so today. Full liquidity will not return to the foreign exchange market until next Tuesday and this may also encourage some position adjusting. The weak data are helping stabilize the bond market (in the U.S. and Europe).

At the start of the week, we suggested that the euro had corrective potential into the $1.3550-70 area. This still seems fair. The risk at this juncture seems to be on the upside. The key seems to be Friday's U.S. jobs data. A strong jobs report, say in the area of a 200k rise in nonfarm payrolls could turn today's price action into a head fake. After all, the ADP data is not seasonally adjusted. Nor does it include government workers. Both factors are thought to have bolstered the employment report.

However, at this juncture it would seem that even a 100k increase would be disappointing. If there is disappointment, continued unwinding of euro shorts could push the euro through $1.36. A convincing move through there could target $1.38 in quick order.

We had expected the sterling to rise toward $1.50. We under-estimated the strength of the short-covering rally. A move now above $1.5200 would likely signal a test on the $1.54 area. As we have noted, many macroeconomic models are suggesting that the sterling is relatively cheap. We have been more reluctant because of political considerations and the risk of a hung parliament.

Some technicals are suggesting that the sterling has a double bottom in place near $1.48. If this is true, the measuring objective, assuming a break of $1.54 confirms the move, sterling could be headed toward $1.60.

The yen is the only major currency the dollar is gaining against. The bears cite the low interest rates that are expected to persist in Japan and wider interest rate differentials. Many expect renewed Japanese interest in the high yielding markets, like Brazil, Australia and yes, the dollar after the start of the new fiscal year. We had anticipated the dollar rising toward JPY93. We under-estimated the cross rate pressure that weighed on the yen. The JPY93.77 is the high for the year and is the highest the dollar has been since last July. If the JPY93.80-JPY94.00 area is taken out, the risk would extend into the congestion bans in the JPY96-JPY98 area.

Our bigger picture and medium-term positive outlook for the dollar has not changed. Whether it happens in April or May, we suspect the U.S. jobs market is turning for the better. We continue to believe the output gap closes fastest among the majors in North America, leading to rate hikes before the ECB, BOE and BOJ.

Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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