Friday’s upbeat non-farm payrolls report prevented an all-out dollar freefall, but this week’s data and price action will help determine whether the greenback has truly bottomed against major currency counterparts.

The US dollar (USD) ended an otherwise difficult week on a strong note thanks to Friday’s better-than-expected non-farm payrolls (NFP) report. At the time, sentiment was so anti-dollar that if payrolls missed expectations, the currency would have crashed, breaking through to new levels in the process.

Though crisis was averted, the labor market report did hint at areas of weakness, but the increase in payrolls was enough to halt the slide in the greenback. The sharp reversal candle in USDJPY and the pullbacks seen in EURUSD and GBPUSD show that investors were relieved to see the report, but the real question now is whether the dollar has bottomed.

Considering that the non-farm payrolls report doesn't change the Federal Reserve’s conversation about tapering asset purchases, this is enough reason to believe that the dollar may have bottomed. If this week's retail sales report also surprises to the upside—and we think it could since stronger spending has already been reported—the 95 level could mark the bottom in USDJPY.

This week will start off with a round of Chinese economic reports on Sunday, including industrial production and retail sales. Since the US retail sales report is not scheduled for release until Thursday, the outcome of these Chinese event risks could set the tone for trading at the beginning of the week. Stronger Chinese data will fuel hopes for global growth, while weaker data will raise renewed concerns.

Bank of Japan (BoJ) Could Intervene This Week

Much to the angst of the Bank of Japan (BoJ) and everyone who has sold Japanese yen (JPY) in 2013, all of the weakness the currency experienced over the past month has now been recovered. Strength in the yen has driven all of the yen crosses lower, with the selloff being led by AUDJPY and NZDJPY, both of which are down more than 8% since their highs on May 22.

The losses in USDJPY weren't modest, either, and even with Friday’s recovery, the BoJ won't be happy with the recent volatility in the yen and Nikkei. Japanese stocks topped out on the same day as USDJPY and have now lost more than 17% of their value.

The only stability is in Japanese government bond (JGB) yields, which are elevated but have not hit a new high over the past few weeks.

At this stage, we strongly believe the Bank of Japan will take some action to calm the markets and ease volatility when it meets this week.

To be very aggressive, the Bank could increase the frequency of bonds purchased, which would show renewed resolve to lift stocks, drive the yen lower, and stimulate the economy. A more moderate option would be to signal plans to increase stimulus, but fail to take immediate action in hopes that forward guidance alone will be enough to stabilize the Nikkei and USDJPY.

Either way, we would be shocked if the BoJ said or did nothing at all, so expect the volatility to continue in the coming week with the greater risk skewed towards central bank action to halt the rise in the yen.

The Primary EUR/USD Catalyst This Week

The euro (EUR) hit a three-month high against the US dollar last week on the back of optimistic comments from the European Central Bank (ECB) and the selloff in the dollar. This week should be a quieter one for the shared currency since there is little Eurozone data upcoming, so unless US retail sales surprise to the upside, the EURUSD should be able to hold on to its breakout above 1.30.

See also: The Key Takeaway from the ECB Decision

The “Shining Star” of the FX Markets

With back-to-back improvements in UK data, the British pound (GBP) was one of last week's most resilient currencies and at one stage traded at a three-month high against the US dollar.

See also: UK Data Scores an Impressive Trifecta

More UK economic reports are scheduled for release this week, including industrial production and claimant count. We are looking for stronger numbers across the board, which could make sterling the shining star again this week. Unlike other central banks, which are battling mixed to weak economic data, consistent improvements in the UK economy allow the Bank of England (BoE) to breathe easier. When the minutes from this past week's central bank meeting are released, we expect to see an air of optimism within the central bank.

The “Blowout Data” from Last Week

While the US non-farm payrolls report was Friday's primary focus, Canada's employment report was the blowout surprise. Canada added 95k jobs in May, the largest amount ever, sending the Canadian dollar (CAD) sharply higher.

The Australian (AUD) and New Zealand (NZD) dollars, on the other hand, extended their slides, adding to a tally of losses last week.

The Reserve Bank of New Zealand (RBNZ) meets this week, and despite the decline in the NZD against the USD, the currency remains strong against the Aussie, which means the Bank won't be happy. The RBNZ recently admitted that it is very uncomfortable with the strength of the NZD against the AUD, and this sentiment could be evident in the upcoming monetary policy statement. If the RBNZ reiterates the need for intervention, NZD could extend its slide. No mention of NZD strength would be very positive for the currency.

By Kathy Lien of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from FXCM.