An important component in today's terrible August ISM report (plunging to a 6-year low of 43.5) is the tumbling prices paid component to 53.5 from 77.00, which is a wake up call for the Federal Reserve's misplaced inflation preoccupation, especially given the tumble in the employment index to 41.8 from 49.

Today's ISM report is not only recessionary, but also underlines the notion that "rescue packages" are merely confidence builders and by no means solutions to the deepening macroeconmic economic slump and the resulting financial market erosion. USDJPY seen extending losses towards 105.20. Despite these dismal US figures, we maintan our pessimism with the high yielding FX such as AUD, GBP (still seen at $1.76) and NZD. EUR eyes $1.3950.

We expect the Federal Reserve to remain on hold for a passing of the Paulson rescue package, which is considered as the last stand before deciding whether it will deliver an intermeeting rate cut. Regardless, 1.50% fed funds by year end can be considered a "done deal".

A potentially gloomy reading in Friday's labor report maybe shadowed by a possible TARP resolution, but will not prevent markets from forcing the Fed to cut rates as the unemployment rate makes its way towards 6.5% before year end.

The smaller than expected 8K decline in ADP report on private payroll jobs helped accelerate dollar buying already emerging on increased reports of short-term USD funding among European banks. Traders are also willing to further punish the EUR and GBP as the ECB and BoE affirm their monetary policy intransigence.

Sterling Faces Further Losses Near $1.7600

A few hours after we warned of sterling's technically bearish pattern yesterday, the currency lost more than 3 cents from $1.8100 to $1.7750. We expect the pair to sustain further damage in the next 24 hours, extending declines below $1.77 and onto $1.76. Although the Bank of England is expected to hold rates unchanged at 5.00%, the reaction is seen widely negative as markets are increasingly focused on the growth priority of central banks than inflation. GBP losses are even more justified by an eventual resolution at the Senate on the rescue package. Also helping the dollar is the smaller than expected 8K in September ADP report on private Payrolls vs expectations of a 50K, decline.

USDJPY Targets 105.20s

Propped by increased optimism that the Senate will pass the rescue package, and by the overnight gains in Wall Street and Europe, USDJPY managed to hold above the 106 figure, with occasional testing of the 106.30s. This morning's ISM report is apt to generate the needed push past 106.30s in the event of a figure above 48. But lack of clarity as to whether the Republicans in the House of Representatives will agree on a resolution as well as labor-market-related gloom ahead of Thursday's weekly jobless claims and Friday's payrolls may stem the pair below 106.60 and trigger fresh damage towards 105.30s.

EURUSD Dragged by Broader Dollar Buying

The final September manufacturing readings on Eurozone PMIs showed declines across the board. Those worked to further destabilize the euro following interventionist remarks from French politicians about the importance of the State's hand in supporting local banks. Talk of a weekend meeting between leaders of France, Germany, UK and Italy and JC Trichet underlines the gravity of the problems on hand. Reports of increased short term USD funding at European banks is further driving the greenback against EUR, CHF and GBP. EURUSD faces initial support at $1.3980, followed by 1.3940.