Key Points
Iran rumour helps to push oil prices and the JPY higher
EUR-USD still firm after yesterday's US confidence and house price data, but upside appetite still seems limited.
Move lower expected unless US news worsens further.
Bernanke's testimony and durable orders in focus today.
Eurozone M3, Swiss KoF also due.

Market Outlook
A rumour that Iran had struck a US Navy vessel in the Gulf led to a sharp rise in the oil price last (it spiked up $5 at one point), although the US denied that anything had happened. However, oil prices are still about a $1 higher than the levels seen late in Europe yesterday and the risk-aversion caused by the development has boosted the JPY and weighed on higher yielding currencies like the AUD and the NZD. US equity futures are also down about 0.4% compared to yesterday's US close.

JPY trading today will be significantly influenced by any words from the US and UK officials about the latest developments with Iran and the impact this has on global equity markets. The main short-term support area on USD-JPY is at 116.70-117.00, while 156.30 and 229.65 hold initial significance for EUR-JPY and GBP-JPY respectively. Overall, the market is still likely to be looking to sell JPY again going into next week, although this will clearly be dependent upon the performance in equity markets and Iran and oil prices have now emerged as a sensitive factor in this regard.

The USD was weaker yesterday following a softer than expected consumer confidence report. The overall level of the confidence index remains at a reasonable level, although the expectations component fell to an eight-month low. A report showing softer house prices was probably more significant given ongoing concerns about the sub-prime mortgage market (see chart). The y/y rate moved into negative territory for the first time since Feb 1996, although such developments are not unusual when conditions change so dramatically as they have done over the past year. However, the market will continue to be jumpy about any negative news on the US housing market.

EUR-USD advanced on the news but has once again failed to push on that much, suggesting some constraints to upside progress, partly because of the positional backdrop. The tone of today's durable orders data and Bernanke's testimony will further influence matters (see below for preview). However, we still see little appetite to take EUR-USD that much higher and some very weak news flow out of the US will be needed to prevent a correction lower - key support at 1.3250-60.

Yesterday's comments from UK MPC members did not reveal anything that hawkish, so the event risk attached to next week's MPC meeting has been reduced somewhat and GBP eased back as a result. King did intimate that the February Inflation Report judgement remained valid i.e. upside risks to inflation and other members did cite high price expectations in manufacturing as a point of concern. However, other comments were more comforting, particularly those relating to a softening housing market and the lack of any upturn in wage growth so far this year. The MPC is clearly in the mood to wait until May before considering the situation further.

Day Ahead
Eurozone - Eurozone M3 data features this morning and while M3 itself looks like remaining fairly strong, the y/y rate for private sector lending is likely to fall further. This time last year the m/m advances in lending were particularly strong, so the base effects for the y/y calculation will be challenging.

Switzerland - the KoF indicator is due and the market will be keen to see whether the m/m rise reported last month - the first since it appeared to top out in June 2006 - can be extended. A few months of strength would be required for it to be a major positive for the CHF, although another positive outcome today would offer some element of support to SNB policy expectations and the CHF.

US - Bernanke's testifies on the economic outlook today and markets will be looking for further clarification on the outlook for policy. Bernanke's semi-annual policy testimony in February included some carefully chosen words about the outlook for housing and inflation that were positive for the equity market, while the recent modification in the FOMC statement also indicates a desire to aid market sentiment. On this basis, more of the same may be seen today, although the Fed will need to be careful not to be seen as becoming soft on inflation. Any defence of such credibility may not equate to optimism about the likelihood of near-term rate cuts. Bernanke will also likely be probed about the issue of inflation targeting as well as the subprime mortgage issue.

Overall, his testimony is unlikely to add that much to market intelligence. Last week's FOMC statement provided few clear pointers about the likelihood of a Fed rate cut, unless there is a more severe downturn in economic activity. This is the essential point - that policy will be determined by how key data variables evolve and the Fed is not sure what will happen in this regard. The observations made about the economy and prices in last week's statement still suggest a very modest tightening bias.

The February durable orders report is also released today and the market will be looking for some clarity after the unevenness of recent months. Durables ex-transport fell 4% in Jan after a 3.2% rise in Dec, although with weaker numbers also seen in Oct and Nov (-1.8% and -0.9% respectively) a stronger number is needed to avert fears of a slowdown in activity. Looking at the chart above the uptrend in core orders has clearly stalled and the situation would become more significant for the Fed if the more stable unfilled orders category (a Fed favourite) were to follow suit.

Diary
Data/event BST Consensus*
 
EU M3 (Feb) y/y 09.00 9.8%
EU M3 (Feb) 3m y/y 09.00 9.8%
EU Private sector lending (Feb) y/y 09.00 10.6% last
CH KOF indicator (Mar) 10.30 1.83
ZA CPI (Feb) y/y 10.30 6.0%
ZA CPIX (Feb) y/y 10.30 5.2%
US Mortgage apps - purchases w/w 11.00 -0.9% last
US Durable orders (Feb) m/m 13.30 3.5%
US Durables ex-transport (Feb) m/m 13.30 1.6%
US Bernanke testifies on economy 15.30
NZ Current account (Q4) 23.45 -NZ$4.1bn
JP Retail sales (Feb) y/y 00.50 0.1%
Latest data Actual Consensus*
US ABC consumer conf (w/e Mar 25) -2 -5 last
GB N'wide house prices (Mar) m/m 0.4% 0.7%
DE Consumer confidence (Apr) 4.4 4.5
SE Retail sales (Feb) m/m 0.4% 1.6%