Market still in risk-loving mood ahead of US ISM Non-manufacturing today. JPY remains weak on global equity strength.

Bernanke's admission of recession fears met with rally in US yields, giving some USD support. Will next couple of days of key data confirm or reject the USD resilience of late?

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• Australia Mar. Performance of Services rose to 53.8 vs. 53.2 in Feb.
• New Zealand Mar. ANZ Commodity Price Index rose 2.0% vs. 1.1% in Feb.

THEMES TO WATCH – UPCOMING SESSION
Key event risks today (all times GMT):

• Norway Mar. PMI (0700)
• EuroZone Mar. Final PMI Services (0800)
• UK Mar. PMI Services (0830)
• Switzerland SNB to Publish Quarterly Bulletin (0900)
• EuroZone Feb. Retail Sales (0900)
• EuroZone ECB's Trichet to Speak (1030)
• US Weekly Initial Jobless Claims (1230)
• US Fed's Bernanke, others to Testify Before Congress about Fed and Bear Stearns (1400)
• US Mar. ISM Non-manufacturing (1400)
• US Fed's Yellen to Speak (0000)
• US Fed's Mishkin to Speak (0015)
• Australia Feb. Retail Sales (0030)

Market Comments

Yesterday, Bernanke actually allowed for the possibility of a recession in an appearance before Congress, which was mostly about updating lawmakers on the Fed's actions of late, especially those related to the Bear Stearns meltdown. Market reaction was rather interesting, the USD reacted with a knee-jerk to the downside, but short interest rates actually rose very sharply in the wake of his comments - two incompatible reactions, really, and the USD found support again after the flurry of selling. Risk trades continued to perform well, with USDJPY reaching a new high above 102.80 and EURCHF now toying with very key long term resistance at the 1.5850/60 zone (now also trendline resistance, we might add). EURJPY is closing in on its 200-day moving average (at 161.25) and commodity currencies had another day in the sun. But, we cast a bit of a jaundiced eye on this rally in risk appetite soon - though timing a top is fraught with difficulty. As JPY crosses slice higher here, one might look to put on a preliminary medium term options position for a dramatic renewal of the USDJPY sell-off at some point down the road.

Yesterday's reaction to the Bernanke data reminds us how much negativity is already priced into the US picture - it's odd to see rates rallying as a CB chairman frets recession risks for the first time! It also reminds us that the rest of the world is relatively equally vulnerable to downside disappointment - particularly Europe, and the EUR looks extremely stretched across the board. Turning megatrends takes some time and doing, but in the big perspective, this EUR is looking very, very expensive.

Today's data focus will be the European PMI for Services and the US ISM Non-manufacturing numbers. Again, the EuroZone has begun to release preliminary readings for these numbers, and the preliminary March PMI Services number came in slightly lower at 51.7 compared to 52.3 in Feb., so we don't look for big surprises there. The US number will receive far more focus after two months in a row of recessionary readings below 50.

Watch out for the Australian Retail Sales data tonight, as AUDUSD can't decide which way it wants to go. Gold and equities are offering some support for Aussie. If the risk-happy mood stays, we could be in for an all-out rally again, especially if 0.9250 falls. A fall back through 0.9000 and an equity sell-off are needed to re-engage the bearish AUD scenario.

Chart: EURUSD
Which way EURUSD? Yesterday saw a bit of a bullish reversal after attempts below the key 1.5550 area, which was an important Fibo level (0.618 for 1.5342 to 1.5895). The pair still needs to take out higher resistance around 1.5730/50 to look like it is in fully rally mode again, however. To the downside, the short term reversal means that we need to see below yesterday's lows to put the sell-off scenario forward again. Note that the trendline break was rejected yesterday. The interest rate differentials don't suggest that a further rally is justified. Remaining data risks for the week (including US employment report tomorrow) could confirm or reverse this impression from rates.