Trichet's refusal to give forward bias on rates sparks dive in Euro crosses. US ISM Non-manufacturing survey dipping back into recessionary levels.

Energy market remains big focus as USD strength doesn't carry through to oil prices. US markets closed for 4th of July holiday today.

MAJOR HEADLINES – PREVIOUS SESSION

• US Jun. ISM Non-manufacturing out at 48.2 vs. 51.0 expected
• Japan May Leading Index out at 92.6% vs. 93.0% expected

THEMES TO WATCH – UPCOMING SESSION
Key Risk Events (All times in GMT)

• US Markets closed for holiday
• Germany Jun. Factory Orders (1000)
• Canada Jun. Ivey PMI (1400)

Market Comments

The US employment report came in largely as expected, which was perhaps good news relative to decelerating expectations after a drumbeat of other negative US employment numbers. The unemployment rate remained elevated at 5.5% vs. the 5.4% expected and we suspect that this number will continue to rise to well above 7% some time in 2009 if we are to expect normal development relative to historic cycles. Putting a damper on the supposedly ok June data were the weekly jobless claims figure and the ISM non-manufacturing number. Coming in at 404k, the initial claims number notched above 400k for only the second time this year. Judging from historical patterns, the trajectory of jobless claims means that a "pipeline" of worse unemployment rate numbers is virtually guaranteed in coming months.

The ISM non-manufacturing dipped back into a recessionary reading below 50 at 48.2 vs. expectations of 51.0. This is an important development as services represent 70% of the US economy. This is only the 14th month that this survey has dipped below 50 in the 132 months the survey has been published, and nine of those months were in 2001-2, which was hardly a recession at all. We can expect this survey to give a forward indication on growth numbers for Q2/Q3, one of which must almost certainly show negative growth.

But the currency market was clearly more interested in what Mr. Trichet had to say - or actually what he didn't say, which was anything indicative about the ECB's future course of action. In most of the testimony, Trichet rehashed the usual warnings about inflation and second round effects, singling out the bad idea of linking wage agreements to inflation, etc. But the ECB's statement said that the 25 bp hike would "contribute to achieving the ECB's objective" and later at the press conference, his comment that he has "no bias" for the future of ECB rates accelerated the losses for the Euro on the day. The decision to both hike and leave guidance unbiased was likely due the growing divisions within the ECB as the patchwork of EuroZone economies are in drastically different circumstances. The short end of the Euro yield curve dipped sharply, with the 2-year rate differential between Euro and the US falling 15 bps by the end of the day in favor of the USD. By the end of the day, EURUSD had fallen a chunky 200+ pips from its new highs and EURGBP was sent into a tailspin after just nicking the 0.8000 level.

Technically, we dare not call a cyclical top for EURUSD just yet, but the reversal was interesting from a fundamental and technical perspective. See more on the technicals in the chart below. From the fundamental side, we know that the ECB is now ready to lay off on further tightening if inflation shows signs of not accelerating as first priority and secondarily if the economy - most notably in Germany - continues to show signs of weakening. This means that we should focus extra attention on EuroZone economic data in coming weeks.

On the inflation front, the touchstone market remains crude oil. And yesterday saw oil defying a huge bounce in the dollar index - a remarkable feat and we can only wonder what will stop this juggernaut. The commodity currencies like yesterday's combination of higher energy prices and an equity market recovery. Watch out for the Canadian Ivey PMI this afternoon in a very thin market....

JPY remains on a weakish footing despite yesterday's rally in yields as the focus was perhaps more on oil prices and the reasonably strong recovery in equities from new lows. The 200-day moving average in USDJPY may come into focus again up at 107.79.

The Swedish Riksbank hiked rates 25 bps as a slim majority of analysts expected to take the rate to 4.50%, but the huge reaction in the market stemmed from very hawkish forward guidance which could bring the rate to 5% by year end of inflation keeps up a head of steam. Still, the Riksbank governor Rosenberg did say that the rates were raised "primarily because the oil price has risen more than forecast." so we have to wonder how moves in energy markets will affect the SEK view going forward.

Chart: EURUSD
The reversal yesterday was remarkable in that the pair reversed from a new 2-month high and made a new 1-week low close all on the same day. This puts up a rather high bar for USD bears for now for the shortest term. Still, in the bigger picture, we've been trading in a range for 15 weeks and seen countless reversals, so there is plenty of wood to chop to the downside before we can put a "bearish trend" label in place. First resistance comes in at the 1.5760 daily pivot area, which is also the 0.382 Fibo for the move from yesterday's high. On the downside, first support comes in at the overnight low of 1.5675, which is also the 0.382 Fibo for the move from 1.5300 to 1.5900, and then at 1.5600 (55-day moving average and 50% retracement) and 1.5535.