The commotion that followed Friday’s much better than expected Non Farm Payrolls was somewhat sedated yesterday as Fed Chairman Ben Bernanke kept his cautious outlook on the US economy, and reined in market expectations that had run wild with the idea of early Fed tightening. Despite US Unemployment ticking down from 10.2% to 10.0%, he still described the labour market as ‘weak’, and added that the economy faces “formidable headwinds” in its recovery. The rhetoric used and the dovish tone he took were nothing new, but given that this account came after Friday’s employment data, markets were forced to reassess whether the conclusions they had reached and their reaction post-payrolls had been justified. FX markets saw a quick reversal some of the day’s earlier moves, sending the USD lower, and most risk assets including gold back up towards flat on the day. Crucially then, despite EURUSD taking out stops through 1.4800 earlier in the session, we failed to get the close below that level that would have given a solid confirmation of a breakout from the prior range. This morning, the pair has drifted back up to benign 1.4840 levels, gold has settled above $1160, and silver is trading back around $18.25.
Overnight, Asian equities traded lower and Japanese policymakers revealed the size of the latest fiscal stimulus package. The JPY 7.2 trillion package was only slightly larger than the market had anticipated, and consequently the JPY has not been sold as aggressively as one might have expected on a larger injection of stimulus. USDJPY has drifted lower to 89.00 levels today predominantly on a reversal of the post-payroll reaction; but we feel that the weight of the challenges that lie ahead for the Japanese economy, and both the MoF and BoJ’s vocal opposition to a strong JPY, mean that JPY will struggle to regain previous ground against the USD.
Although yesterday’s data calendar was rather lean, today we have a few more releases to consider: The UK Industrial Production and Manufacturing Output figures are due mid-morning in the European session, and will be one of the last significant data prints ahead of Thursday’s BoE meeting. After GBPUSD took out the 1.6485 levels yesterday morning on strong selling from model accounts, the next downside level and major support to watch is 1.6272. There will also be Industrial Production data released out of Germany, but given how little German data has affected EURUSD lately (which has instead been driven by USD sentiment), we feel this is unlikely to move the markets.
The highlight of the afternoon will be the BoC Rate decision; where the consensus is for rates to be kept on hold once again at 0.25%. Furthermore, it is expected that the commitment to maintain current policy rates will be affirmed until the end of Q2 2010, as Canadian CPI is still subdued at 0.1% YoY – well below the BoC inflation target.