Currency Markets to Look Past European Data, Focus on Bernanke and US GDP

Key Overnight Developments

• Japanese Deflation Deepens, Jobless Rate Unexpectedly Falls
• Euro, Pound Flat as Currency Markets Consolidate in Asian Trade
• Yen Sold on Intervention Fears Ahead of PM Kan’s Press Conference

Critical Levels

The Euro and the British Pound were little changed in Asian trade as currency markets consolidated ahead of tomorrow’s potentially sentiment-defining US GDP release as well as Fed Chairman Ben Bernanke’s speech at the central banker summit in Jackson Hole, Wyoming. We remain short EURUSD and flat GBPUSD.

Asia Session Highlights

Japan’s Consumer Price Index slid 0.9 percent in the year to July, showing deflation deepened for the first time in three months. The outcome didn’t prove market-moving, printing in line with economists’ forecasts. Still, the result marked the 17th consecutive month of falling prices, reinforcing concerns about slowing growth in the world’s third-largest economy and underscoring the precarious state of the global recovery as most of its leading engines begin to falter. Indeed, looking beyond Japan, Europe faces formidable headwinds from its debt-cutting measures while the US growth losses momentum and China willfully pulls on the brakes amid fears of asset bubbles and runaway inflation.

Meanwhile, the Jobless Rate unexpectedly ticked lower for the first time in six months, down to 5.2 percent after the economy added 210,000 jobs in July, the most since January. While the outcome seems encouraging, its implications for the currency are likely limited considering the persistence of deflation is likely to keep the Bank of Japan in dovish mode for the foreseeable future. Furthermore, the export-dependent Japanese economy looks decidedly vulnerable amid increasingly apparent signs of a broad-based slowdown in global demand in the second half of the year. Labor markets tend to lag other parts of the economy during turns in the business cycle, hinting that it may be some time before Japanese employment figures begin to reflect a slowdown, but leaving traders unconvinced by seemingly robust headline figures nonetheless.

The Japanese Yen tracked lower after Chief Cabinet Secretary Yoshito Sengoku announced that Prime Minister Naoto Kan would hold a formal press conference tomorrow to discuss his plans to fight deflation as well as the recent appreciation of the currency, sparking intervention fears.

Euro Session: What to Expect

A revised set of second-quarter UK Gross Domestic Product figures headline the economic calendar in European hours, with expectations set to confirm the economy added 1.1 percent in the three months through June, marking the largest increase in over nine years. However, markets will be most interested to see the breakdown behind the headline figure to see if the economy remains overly reliant on public spending to stay afloat, with traders keen to gauge the growth and monetary policy implications of the government’s austerity budget that aims to shrink the deficit by a whopping 6.3 percent of GDP by 2014-15.

Preliminary estimates of Augusts’ German Consumer Price Index figures are set to show the annual inflation rate slowed to 1.1 percent, underscoring a lack of urgency in reversing the European Central Bank’s accommodative monetary posture as a widespread slowdown in global activity threatens rob the currency bloc’s largest (and acutely export-dependent) economy of key overseas demand, compounding forthcoming downward pressure from the region’s debt-cutting measures.

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