FOREX UPDATE : USD

USD ISM, Bernanke and payrolls key this week: the USD has started the week and the new quarter, trading in a 1.2665-1.2689 range against the EUR and a 117.87-118.40 range against the JPY.
The greenback has stayed range bound against the EUR despite ten year bond yields falling sharply throughout Q3.
In contrast equities have strengthened. On the surface it looks as if rallying bond and equity markets are signalling conflicting outlooks but the sharp decline in oil prices can partly explain the rally in both markets.

The USD has remained supported as Fed officials have not yet dropped their bias to tighten further. But on Friday Dallas Fed Fisher said there were signs that inflation pressures were abating and St Louis Fed Poole said that a more rapid slowdown in growth and signs of waning inflation would prompt the Fed to ease interest rates.

It's a key data week in the US, with the manufacturing ISM later today and the September employment report ending the week. We expect the ISM headline to hold steady around last month's levels, while payrolls likely continued to advance at the subdued pace of the last three months, with our 125k target in line with the trend of the past six months. With rate markets pricing a risk of easing by year-end, markets would likely be sensitive to upside surprises. However, it would likely take a significantly above-consensus print on payrolls to alter Fed expectations materially.

Markets will also listen closely to Fed Chairman Bernanke's speech at the Economic Club of Washington on Wednesday for any sign of shift to a more neutral policy stance. Also of note, Treasury Secretary Paulson is scheduled to visit New York for closed door meetings with the New York Fed and financial and business executives.