The U.S. economy shed 20K jobs in January, worse than the +13K consensus. One the positive side, the unemployment rate dropped from 10.0% to 9.7%; no changed was expected. Manufacturing employment was also a positive with 11K jobs added compared to the -20K consensus.

The market liked the report at first but the focus later shifted to sovereign worries in the eurozone. The euro fell to a nearly one-year low against the yen and the weakest level in 8 months against the USD on Friday before recovering somewhat. The worries that have been dragging down the euro are related to budget deficit concerns in Portugal, Ireland, Greece and Spain – the so-called PIGS. The cost of insuring against government default in those countries rose to record highs on Friday. Also weighing on the euro was economic data on German industrial output. It fell 2.8% in December compared to +0.5% consensus and +0.7% in November.

There was a bounce late in the day but it pales in comparison to the meltdown from 1.40. The risks at this point, are skewed towards a further euro rebound. EUR/USD is at highly oversold levels and the market can’t pound the euro for worries about Greece forever.

The short-term trade is for a bounce to 1.3739 or even 1.3755 but the broader market sentiment is to sell the rallies. Agressive traders may sell 1.3739 but we see the 61.8% Fibonacci retracement (1.3855) as a better level to sell the EUR on a rebound. If the euro moves above 1.39 we would cover and look to short again at 1.40.