Dollar rallies significantly following hawkish comments by Ben Bernanke at FOMC

Tom Tong20/Jun/2013Currency Updates

GBP

Sir Mervyn King’s final vote as the Governor of the Bank of England was once again outweighed as the rate-setting committee voted six votes to three against extending the Bank’s quantitative easing programme, as shown in June’s Monetary Policy Committee (MPC) meeting minutes released on Wednesday. The minutes also showed that, as expected, all MPC members voted to keep the Bank Rate at 0.5%.

As Ben Bernanke moved to further confirm the prospect of a tapering of the US bond-buying programme later this year, the Bank of England’s nine man committee was split on whether to augment the £375bn which has so far been allocated to the UK’s QE asset purchase scheme. Despite Sir Mervyn, and two other MPC members voting to boost the programme by a further £25bn, the overarching sentiment emanating from the meeting was notably more dovish than many would have expected. With Mark Carney replacing King on 1st July, attention will move towards whether the incoming Governor’s voting will reflect his comments made before the House of Commons Treasury Select Committee earlier this year when he advocated a strategy of flexible inflation targeting.

On Wednesday evening, Sir Mervyn used his last speech as Governor to endorse the Chancellor of the Exchequer, George Osborne’s proposals to drastically reshape the UK’s two state-owned lenders, the Royal Bank of Scotland and Lloyds Banking Group. King told listeners at Mansion House that the measures announced by George Osborne on Wednesday evening concerning RBS’s toxic loans and the planned privatisation of Lloyds would allow the banking system to regain a definitive role in the recovery of the British economy.

Today, the Office for National Statistics releases last month’s Retail Sales (m/m) data with many analysts expecting an upside on April’s -1.3% contraction.

USD

Ben Bernanke, chairman of the Federal Reserve injected volatility in to equity and currency markets yesterday after he suggested that the central bank’s QE programme could be tapered in late 2013 if its predictions about the economy were accurate. Bernanke was insistent that any reduction in QE would be based on steady growth and improved unemployment figures. Mr Bernanke told the press “We have no deterministic or fixed plan” and that tapering of the programme was akin to “letting up a bit on the gas pedal” and “not beginning to apply the brakes”.

The chairman went on to clarify that tapering would not imply a tight monetary policy, but a tempered reduction in the scale of the asset purchases which currently stands at $85bn per month. The FOMC left the funds rate at the levels it has been since 2008 at 0 to 0.25% and the Fed reiterated that it would not consider raising rates until the unemployment rate, currently 7.6% fell to 6.5%.

The Fed said that inflation could run as low as 0.8% this year, but will pick up next year to between 1.4% and 2%. Fourteen of the 19 Federal Reserve Board members and bank presidents who set the quarterly projections, said that they did not think it would be appropriate to raise interested rates until 2015. Mr Bernanke has been Chairman since 2006 and is expected to stand down when his second term ends in January 2014.

The Dollar Index gained for a second day, up 0.2%, the Dow fell by 206.04 points and the S&P 500 lost 1.4%.

Data releases from the US today; Initial Jobless Claims forecast to rise from 334k to 340k, Markit Manufacturing PMI expected to increase from 52.3 to 52.8, Existing Home Sales to remain the same and the Philadelphia Fed Manufacturing Survey to move from -5.2 to -0.2.

EUR

After the news out of of the States yesterday, the euro weakened dramatically against the dollar, reversing the moves of the past 10 days. This is more down to the USD strength than the EUR weakening.

The politicking about Britain’s continued membership of the EUR stepped up yesterday. Conservative MP James Wharton introduced draft legislation for a referendum on Britain’s membership to be held during 2017. If passed, the draft bill will mean that by the end of 2016, a date will need to be set during 2017, and that the question will be ” Do you think that the United Kingdom should be a member of the European Union?”. The bill had to be introduced as a private member’s bill due to the fact that the Lib Dems did not support the bill. It is believed that Labour will not oppose the bill, and this means that it should pass through the Commons on this reading.

The economic situation in Italy, the eurozone’s third largest economy, continues to depress. Following on from a disastrous 2012, where their economy shrank by 2% and seven straight quarters of decline, Italy’s GDP, measured against an EU average of 100, dropped to 98. This means that Italians are now poorer than the average EU citizen. The same can also be said for Spain who posted figures of 97. Whilst the smaller economies on the periphery have shown growth, for example Bulgaria and Latvia, this reduction for the larger more established economies is a worrying trend for the single currency.

Cyprus stated that they are fully committed to the terms of the EU bailout, and that they have already started down the road of implementing the necessary procedures. This is in reaction to Nicos Anastasiades previous letter saying that the bailout had been implemented without careful preparation. One of the main areas of concern is over the capital control provisions. Capital control goes against one of the key requirements of any single currency zone, ie the free movement of capital among members.

No top tier data releases today, but attention should be paid to the Markit Manufacturing PMI of both the Eurozone as a whole and also Germany individually.

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Written by Tom Tong

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