Ben Bernanke disappoints investors by failing to indicate the imminence of QE3

Publication date: 18 July 2012
Author: Richard Driver, CaxtonFX

US Federal Reserve Chairman Ben Bernanke gave a speech yesterday and once again disappointed investors by failing to indicate the imminence of QE3. Monday’s awful US retail sales data had raised hopes that Bernanke would finally be convinced of the need to boost the economy, but his comments suggested he remains content to wait and see.

This morning it will be the Bank of England in focus via the release of the MPC meeting minutes. This afternoon will also see Bernanke give another speech.

STERLING/EURO: Sterling is trading within a reasonably tight range ahead of this morning’s MPC minutes and UK unemployment data.

The market has seemingly set aside eurozone concerns for the time being, though the state of bond yields in Spain and Italy will ensure the euro’s respite proves short-lived indeed. The market will be expecting some distinctly dovish rhetoric from the MPC minutes this morning, as it does from the vast majority of central banks in current economic climate. Exactly how dovish the minutes are will determine whether the pound suffers as a result. A unanimous decision on this month’s QE decision could hurt the pound a little, but clues as to further QE will probably determine direction.
As well as the MPC minutes, we also have the monthly UK unemployment figures and a further rise in claimants is expected. This pair is trading below €1.2750 and the pound may come under some pressure today.

STERLING/US DOLLAR: Sterling recovered from some weak UK inflation data but this pair looks to be capped at $1.57.

Bernanke reminded the market that the Fed is prepared to take further action to promote a stronger recovery as appropriate, but this was insufficient for a market which is crossing its fingers from a genuine signal of intent. Slowing US growth was reiterated and frustrations with slow progress on US unemployment and the eurozone debt crisis were emphasised. So it was a case of more of the same rhetoric from Bernanke.
Yesterday’s UK inflation data fell to a 31-month low, which is clearly negative for the pound as it paves the way for more QE if required. Sterling bounced back nonetheless, but a push beyond $1.57 looks a stretch. For now it trades at $1.5650.

EURO/US DOLLAR: The euro bounced back off the $1.22 once again but upside potential looks limited.

Germany’s constitutional court announced yesterday that it will delay its decision on the legality of the ESM changes and the fiscal pact until September, which adds to the uncertainty that will characterise the coming weeks and months in the eurozone. Nonetheless, poor US retail sales data and a stronger day for global equities were enough to help this pair off its lows below $1.22.
The dollar’s weakness yesterday afternoon is all about positioning for some dovish comments from Bernanke this evening and we believe the market may be disappointed once again. This pair trades at $1.23.

STERLING/AUSTRALIAN DOLLAR: Sterling remained under pressure against the aussie dollar in the aftermath of the RBA minutes.

The aussie dollar maintained its post-RBA minutes momentum yesterday and was given another boost last night by a positive Australian economic gauge last night, which hit a nine-month high.
We continue to view the aussie dollar as particularly ripe for a pullback, which should see this pair benefit from some considerable upside in the coming weeks. For now, this pair trades below 1.52.

STERLING/NEW ZEALAND DOLLAR: Sterling makes some decent gains as the weak kiwi inflation data continues to weigh.

The market continued to punish the kiwi dollar for Monday night’s weak kiwi inflation data, increasing bets that the Reserve Bank of New Zealand will choose to cut interest rates this year. Weaker dairy prices also weighed on sentiment towards the kiwi dollar.
This pair is trading up at a three-week high towards 1.97 this morning and there is room for further gains up towards 1.98, though the MPC minutes provide plenty of short-term risk.

STERLING/CANADIAN DOLLAR: The Bank of Canada left its interest rate unchanged at 1.00% but a rate hike remains on the table.

There was no change to the BoC’s monetary policy yesterday. It remains one of the few global central banks that are looking to hike rates at some point. Its economy is certainly strong enough to withstand monetary tightening; it is external risks that are making the BoC think again. The BoC did downgrade domestic growth forecasts yesterday, which stopped the loonie from rallying.
Sterling is trading at 1.5850 and today’s speech from Bernanke will be as important as ever.