EUR USD (1.3070) Firm manufacturing data from across the globe boosted demand for equities and the euro rebound yesterday. With the Portuguese bond yields falling after a good auction and the Greek deal seemingly looking closer to resolution, the markets are now likely to focus on Fed. In his testimony before the Senate, Ben Bernanke is expected to reinforce his dovish stance, but against a new backdrop of an inflation target of two percent. In this context yesterday’s ADP has set a stage for debate on Fed’s mandate on unemployment. An expected increase of 170k jobs signalled a slowdown in job growth in the private sector. For some disposed to a hawkish stance this slowdown in job growth is not enough to imagine a recession scenario – the labour market after all is on the right path. But for those looking for a justification for continued low interest rates, the ADP data also provides no arguments for tightening. After all, this is a risky global environment where sluggish growth in jobs can easily reverse. While over two months unemployment has fallen to 8.5 percent, a Chicago Fed study argues that the baby boomers’ disengagement from the labour market plays a role in this decline. This is a group that earned a lot, consumed a lot and paid a lot of taxes. Arguably, then, the Fed may have a lower employment rate in mind than popularly thought, perhaps even below 7.5 percent. We remain bullish for the euro and look for a climb to 1.3280/90. Good supports are at 1.3065 and at 1.2910.
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Deutsche Bank