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The strong unemployment number from the US on Friday has opened the market’s eyes to the divisions in monetary policy at the Federal Reserve. Non-Farm payrolls printed a gain of 216k in the month of March with the unemployment level dipping to 8.8%; both beat the consensus estimates. The split emerges with some members wanting to keep policy loose until we see another couple of percentage points of improvement in the jobs market while others are, like most central bankers, worried about inflationary risks and asset price bubbles.

It is likely Q2 of 2011 is going to start much like Q1 ended i.e. With the euro on top and the pound losing ground as its fundamentals continue to deteriorate. Friday’s poor manufacturing PMI release came as a surprise and sets up some pretty ready concerns about the services PMI due tomorrow. The MPC are likely to leave rates on hold at their meeting on Thursday while they wait for the details of the latest quarterly inflation report and the prelim reading of Q1 GDP.

The meeting that will be in focus is the ECB’s also on Thursday. The hawkish stream of noise coming from the Committee suggests that a rate rise is inevitable, especially after the 2.6% inflation flash release we had on Thursday morning. An increase by 25bps is completely priced into the market at the moment although we are an outlier in that we still think that some modicum of sense may prevail and a hike will be waved off to give the periphery just a little bit more time to recover from the funding crisis that it is currently experiencing. It is likely that the euro will remain bid throughout the week on these concerns.

The other central bank due to report this week is Australia’s RBA which we also expect to hold rates at 4.75% as they aim to keep policy loose to keep spending strong in light of the floods in Queensland in December.

Bernanke is speaking today in a speech titled “Clearinghouses and Stability” which, although it sounds mind-numbing, may give him the opportunity to lay out his monetary policy beliefs. Data comes from the UK in the form of construction PMI at 09.30.

 Latest exchange rates at time of writing