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Bernanke’s comments could turn currency markets today
22 May 2013 • Source: Nawaz Ali, Western Union Business Solutions
Sterling endured its biggest fall in weeks yesterday after a sharp drop in UK inflation and comments from Mark Carney strengthened fears that despite signs of an economic recovery in Britain, the Bank of England will turn more aggressive on monetary stimulus when Carney takes over as governor in July. Underlining his standing as a monetary activist, Carney yesterday urged Europe to follow Japan’s all-out approach to monetary easing.
The comments came ahead of today’s critical updates on the British economy, with investors waiting for the latest UK retail sales data and minutes from the BoE’s May policy meeting. Should the minutes reveal another split vote on re-launching the central bank’s QE programme, sterling will probably face another difficult session today. However, the pound’s downside may just be limited by today’s update from Federal Reserve Chairman, Ben Bernanke.
Last night, the Bank of Japan kept the yen on vulnerable ground by repeating its plan to achieve 2% inflation through its radical asset buying plan. The US dollar could also be left exposed today if Bernanke catches markets off-guard by insisting that US monetary policy must remain accommodative for several months yet. The Fed will also release minutes from its earlier policy meeting today although Bernanke’s comments are likely to be key.
Sterling suffered its biggest one-day fall in weeks against the euro yesterday and hit new six-week lows versus the US dollar after a sharp decline in UK inflation and comments from Mark Carney stirred fears of more monetary activism in Britain. The pound’s woes come before critical data updates on the UK economy this morning along with minutes from the Bank of England’s most recent policy meeting. UK consumer spending and public borrowing figures will shed light on the state of the economy while BoE minutes should reveal whether or not further asset purchases are likely. Tuesday’s data showed consumer price inflation fell by a more-than-expected 0.4% to 2.4% (y/y) in April, surprising analysts who had forecast a 2.6% print. This marked a large shift towards the central bank’s 2% goal, giving policymakers more room to explore further monetary support which is something Mark Carney may look to do in July. Carney takes over from Mervyn King as BoE governor in just over a month’s time. Speaking yesterday, Carney unnerved sterling traders by urging Europe to mirror Japan’s all-out approach to monetary easing, underlining concerns that he make take up a similar line at the BoE.
The US dollar’s weaker tone this week suggests the greenback may be set for a bigger correction lower; a correction that could be triggered today should Federal Reserve Chairman, Ben Bernanke, fail to signal to markets that recent US economic data is pointing the Fed towards reducing its monetary stimulus. Bernanke will be speaking in front of lawmakers this afternoon and will deliver his latest assessment on the US economy. The US dollar came close to three-year highs on a trade-weighted basis last week as a number of economic reports in recent weeks indicated that the Fed may need to start planning for an end to its quantitative easing support. However, with US inflation low, unemployment still below target and US fiscal policy uncertain, Bernanke may catch investors off-guard by insisting monetary policy must remain accommodative for several months yet.
The euro firmed yesterday and may remain on steady ground after the Bank of Japan reaffirmed its commitment to aggressive monetary easing last night and before Ben Bernanke’s speech today in which the Federal Reserve Chairman may also repeat the US central bank’s pledge to keep its policy highly accommodative for now. The single currency has also found support from a weaker sterling, with the pound hit yesterday by fresh worries about Bank of England policy. However, tomorrow’s euro zone PMI data should also fuel speculation about future European Central Bank monetary policy.
The yen opens lower this morning and remains insight of earlier 4½-year lows against the US dollar after the Bank of Japan ended its two-day monetary policy meeting overnight with a firm commitment to its plan to double Japan’s monetary base. There was no change to the BoJ’s April decision which was to reach 2% inflation in two years’ time through a new outsized bond buying plan. Although, Governor Haruhiko Kuroda did warn that volatility in Japanese government bonds may force the BoJ to vary the pace of its asset purchases; a concern that may gain traction in the coming weeks or months.