In complete contrast to the market reaction to perceived comments by Fed chairman Bernanke last week the minutes of the latest FOMC meeting revealed a committee leaning away from further easing measures. The minutes showed that there was no discussion of any new form of easing and this realisation wrong footed the markets sending the US dollar higher and stocks lower. The minutes shouldn’t have really been too much of a surprise given the resilience of a lot of the recent economic data, as well as any difficulties a further round of QE could cause.

The level of unemployment remains a key factor in any Fed deliberation in this area and this afternoon’s March ADP numbers, are expected to encourage in that department with the numbers slipping slightly from 216k to 205k.
This will then be followed by the ISM services data for March which is expected to slip from 57.3 in February to 56.9.

In the UK today concerns about a double dip recession receded further yesterday when construction PMI data for March leapt to 56.7, well above expectations of 53.6. These concerns could be alleviated further if March services PMI today posts a similarly positive reading with expectations of a reading of 53.5, slightly down from February’s 53.8.
A robust reading in services would then bear out the (BCC) British Chamber of Commerce’s estimation that the UK will return to growth in Q1, and consign the OECD’s assessment last week to the dustbin of forecasts.

The picture in Europe remains a troubled one with deteriorating economic data starting to seep into the core countries of Europe as the austerity led recession continues to bite. Today’s Spanish bond auction will give markets the opportunity to make a judgement on the latest austerity budget which is set to make €27bn worth of cuts amounting to nearly 3.2% of GDP. Rising bond yields in recent days suggest the risk premium could be a steep one.

After this weeks disappointing manufacturing PMI it seems likely that similar weakness will be seen in services PMI data for March for Italy, France, Germany and the wider Eurozone. Expectations are for readings of 44, 50, 51.8 and 48.7 respectively.

Anyone expecting a pickup in retail spending should also prepare for disappointment if last week’s poor German numbers are anything to go by. Eurozone retail sales for February are expected to fall 0.2% on a monthly basis and 1.1% on an annual basis.
German factory orders for February may offer a sliver lining on a monthly basis with a rise of 1.4% expected but on an annualised basis they are expected to post an even bigger drop of 5.5%.

A day earlier than normal due to the Easter break the ECB is expected to announce its latest rate decision with no change expected, and the bank expected to remain in “wait and see” mode.
It will be notable to see whether Draghi changes his tone with respect to the outlook for the European economy given some of the disappointing economic data seen in recent weeks. If anything he will continue to urge European governments to press on with their reform programs.
At his last press conference he was quite upbeat, if a little cautious. It would be instructive to see if the bank revises its estimates of euro area growth in the same way it did at last months press briefing. The bank probably won’t revise its inflation forecasts. Any further comments on the LTRO’s could also be instructive given that there remains scant evidence that any of the money is filtering down into the real economy.

EURUSD – yesterday’s plunge through the 1.3250 level could be the signal for a test of 1.3000, however we need to stay below 1.3280 for this scenario to play out. The next support comes in at last week’s lows at 1.3180/90, which is also a key level.
The 1.3385/90 area remains the key resistance area on the upside and while this remains intact a weaker euro remains the preferred option.

GBPUSD – a slow grind up has been followed by a sudden drop down as the pound fell sharply back below the 1.6000 level late yesterday evening, and in the process also fell below the 1.5930 level, which suggests we could well see a move to 1.5820. Below 1.5820 argues 1.5610 again.
The speed of this move lower suggests that any move back above the 200 week MA currently at 1.5990 could be difficult to sustain. A failure to close above this average keeps the structural bias negative for the pound.

EURGBP – yesterday’s short squeeze sent the euro back to 0.8358 but not beyond the 0.8400 level which continues to be the proverbial line in the sand for further gains. While above 0.8280 the recent range trading seems to be the order of things, however a move below 0.8280 retargets the January low at 0.8220.

USDJPY – the chop in the US dollar here continues to keep traders on their toes, however the outlook remains positive while above the weekly cloud support at 80.70. To retest the twin highs at 84.20 we need to get back through last week’s high at 83.40.
We still need to remain mindful of the bearish engulfing weekly candle of two weeks ago which suggests in the short term a period of consolidation towards the cloud support at 80.70 which remains possible on a break below 81.90.
A break above 84.20 negates the bearish candle and suggests a move to 85.15.