Yesterday’s unexpectedly downbeat comments from Fed Chairman Bernanke about the state of the US economy and the jobs outlook prompted a sharp sell-off in the US dollar and a sharp rally in equity markets as investors looked for the next dose of monetary easing to come sooner rather than later, and maybe even as early as June this year.

Markets do need to be careful though given that it is an election year as further QE could well have substantial political consequences, which still makes it very unlikely before this years US Presidential election, unless economic data falls off a cliff.

This may explain the performance of US 10 year bond yields which don’t seem to be buying this soft tone with yields closing the day higher, and if bond markets were looking at pricing in more QE they surely would be lower.

The chairman’s tone also seems completely at odds with the recent economic data, even though housing data continues to disappoint, but that’s not really a surprise given the state of the US housing market.

Today’s US consumer confidence data for March will be a key test of this downbeat tone with expectations of a slight drop from 70.8 in February to 70, though recent increases in gasoline prices could see that figure drop more. A weaker dollar certainly won’t help in that regard either, another reason Bernanke could be playing with fire with his dovish stance.

Concerns about Europe are never too far away ahead of this week’s eurogroup finance ministers meeting though talk that Berlin is now willing to countenance the running of the EFSF and ESM side by side appears to have made European policymakers a lot more comfortable with how things are playing out, with Spanish bond yields slipping back to 5.31% from 5.38% at the end of last week.

After yesterday’s positive IFO numbers today sees German Gfk consumer confidence for March which is also expected to improve from 6 to 6.2, while import prices are expected to slow.

In the UK the Bank of England quarterly bulletin published overnight warned that households would have to save more and work longer in future years.
The bank went on to say that Britons had been saving too little for a long time. At around the same time MPC member David Miles went on to defend the Bank’s policy of QE which discouraged saving and kept savings rates low.

Later today the latest CBI retail sales numbers for March are expected to show that consumer activity remains depressed by rising unemployment and high inflation with expectations of a decline from last months surprise recovery to -2 to -5.

EURUSD – yesterday’s break above the 1.3300 level has seen the single currency retest the 1.3370 level which was the base of the 27th February double top pattern from the 1.3490 highs this year.
A break through the 1.3370 level could well retarget this area.
The 1.3300 level should now act as support in the interim while a break back below retargets last weeks low at the 1.3135 area.

GBPUSD – the pound continues to squeeze higher breaking back above the 1.5930 level as it looks to retarget the 1.6000 area. Above that retargets the October and November highs at 1.6170.
The 1.5820 level should once again acts as support on the broader level on any dips. Once below that the 1.5610 50% retracement of the entire up move from the 1.5240 lows to the 1.5990 highs, remains a key support.

EURGBP – still in the broader range with the 0.8370 level keeping a lid on any rally for now, though the 0.8400 level remains the larger level and as such the single currency remains range bound with support around the 0.8320 area.
While below the 0.8400 level the focus remains for a move towards a retest of the January lows at 0.8220, on a break below the 0.8280 level. Above 0.8400 retargets the 0.8425 area.

USDJPY – the US dollar held above the 81.85 level and rebounded back towards the 83.00 level before slipping back. The broader resistance remains at the double top at 84.10/20, but last week’s drop saw a bearish engulfing weekly candle which suggests in the short term a period of consolidation towards the cloud support at 80.60.
In the medium term we could well have seen a short term top but the bias remains for a longer term move higher, while US 10 year yields remain firm.