Both the euro and the yen bounced within 40-60 point ranges for most of the Asian and early European sessions but found little directional bias ultimately settling near the 1.3700 and 119.00 levels respectively. The news out of Japan provided little guidance to most market players as the improvement in labor conditions which saw the unemployment rate reach a 9 year low at 3.7% was offset by the less than stellar increases in overall household spending. Household spending rose by a meager 0.1% - far weaker than 0.7% market forecast. Furthermore labor cash earnings decreased by a rather significant -1.1% - the seventh monthly decline in a row.

Thus the Japanese economy finds itself in a paradoxical position as jobs expansion maintains a healthy pace, but wages continue to contract. This failure of the economy to materially increase the purchasing power of everyday workers despite improved profitability at the corporate level is resulting in a drag on consumer demand. Little wonder then that Economics Minister Ota noted overnight that the country is not yet out of deflation and that economic and fiscal reforms must continue. Given tonight’s softer consumer data, it is difficult to imagine that the BOJ will choose the raise rates in August. Indeed, BOJ policymakers are far more likely to wait for some signs of improvement in workers’ incomes before tightening monetary policy further. The yen therefore remains vulnerable to further carry trade sales if global capital markets continue to stabilize this week and risk appetite returns.

Despite a deluge of data out of the Eurozone, currency traders found no directionality from tonight’s reports. Much like in Japan, employment news was positive as German data showed marked improvement in the figures. German unemployment declined by greater than forecast -45K to register the lowest unemployment reading in 14 years. The unemployment rate now stands at 6.3% and coming as it does on the heels of better than expected numbers from France yesterday suggests that the recovery in the Eurozone remains solid. Yet, the consumer remains a problem in the EZ as well. Tonight’s German retail sales printed a gain of only 0.7% vs. expectations of a 1.2% jump. In short the tepid results failed to provide enough conviction to either bulls or bears and EURUSD spent the night seesawing around the 1.3700 figure.

Attention will now turn to the North American session where the focus will rest on the Consumer spending/income data. As we noted in our weekly, “After two consecutive months of negative spreads between consumer income and spending the market is looking for an improvement. However, should the number print negative again it could put additional pressure on the buck, indicating further deterioration of consumer balance sheets.“ Should that occur the EURUSD may well break to upside in its role as the primary proxy of anti-dollar sentiment.

Boris Schlossberg is a Senior Currency Strategist at FXCM.