Stage Set For Bernanke Disappointment

Speculation about a less-dovish Bernanke dominated ahead of his Jackson Hole speech, sending the US dollar broadly higher. On the day, JPY was the best performer while AUD lagged. The Asia-Pacific calendar is busy to wrap up the week with Japanese CPI and industrial production.

Economic data was slightly softer on Thursday but not strong enough to force more easing. Initial jobless claims rose to a one-month high of 374K compared to 370K expected. Personal consumption and PCE core inflation were both one tick lower than expected at 0.4% and 1.6%, respectively.

The primary reasons not to expect further Fed easing are inflation fears (especially commodities), the Fed wanting to conserve firepower if the outlook worsens and tentative signs of better growth since July.

That sentiment dominated ahead of the decision making euro and sterling longs especially nervous. The trigger for the sharp round of USD-buying were comments from the leaders of Spain and Slovakia.

See Ashraf's take on Jackson Hole & Beyond: http://www.cityindex.co.uk/market-analysis/market-news/54392012/onto-jackson-hole-beyond/

Spanish PM Rajoy said he will not make a decision about bailout funds until all the terms are clear. Market watchers were positioning for euro longs ahead of EU finance minister meetings in September but are now shifting to the Oct 19 EU summit and another newly-planned November summit. Both dates leave plenty of time for another euro downdraft.

The Slovakian PM pushed nervous euro longs over the edge when he said there is a 50-50 change of a euro breakup.

EUR/USD cratered to 1.2486 from 1.2560 and cable fell a full cent to 1.5770. The commodity bloc was also sensitive and AUD/USD fell below 1.03 for the first time in a month.

The major data from Japan will be released promptly. At 2330 GMT, Japanese unemployment is expected to remain at 4.3%. At the same time, the July national CPI is expected to fall 0.3% y/y, the worst level of deflation this year and something that clears the way for more action from the BOJ.

Twenty minutes later, July preliminary industrial production is expected to rise 1.7% m/m after a 0.4% rise in June.

Other highlights include Australian private sector credit, the China business sentiment indicator from MNI and Japanese household spending.

-AB