Central banks closely watched

Currencies Direct July 22nd 2010 - 2 minute read

Last night Ben Bernanke, Chairman of the Federal Reserve, delivered his twice yearly report to Congress where he outlined their outlook on the US economy. Due to the oblique nature of Central Bank parlance, Mr Bernanke’s speech was closely watched for any indication, however vague, that the Fed thinks the economic recovery in the US is not proceeding the pace originally thought. He duly obliged, saying that the outlook was “unusually uncertain” and stressing again that persistently high unemployment remains a real problem and is likely to remain so for an extended period. The dovish tone and increasingly cautious outlook naturally led to a reduction in risk appetite and the corresponding sell off in US equities and rise in the Dollar. Cable had a volatile days trading yesterday, just before 8am we saw a huge Sterling sell, dropping from 1.5290 to 1.5168 in a minute before recovering after reports of a fat finger or algorithmic trading problem at a bank in the Netherlands. Whatever happened, we are sure someone is seeking alternative employment this morning.

Sterling has just received a welcome boost after the release of positive retail sales figures. Data showed a 0.7% increase month-on-month & 1.3% yoy, the highest monthly figure since April 2008. The ONS suggested the World Cup boosted consumption of electrical goods, which after England’s performance should see double whammy after people look to replace the TV’s thrown out of the window after the Germany game. Bank of England minutes released yesterday showed a 7-1 vote in favour on keeping interest rates on hold, with Andrew Sentance, the only dissenter, voting for a rate rise. More interestingly, the minutes showed discussion of an extension to the asset purchase scheme if, as expected, the economic outlook continued to deteriorate. Sterling continues its recent volatility in light of the comments & also rumour circulating yesterday that the bank has reopened dollar swap lines and low liquidity in the market exaggerates moves.

The Euro continues to tread water ahead of the Stress test results. There is increasing uncertainty around the release of the results, the planned announcement is tomorrow at 4.30pm, but there are rumours that they may even release the figure today. Strange that an exercise in reducing uncertainty and restoring credibility is actually having the opposite effect, and that is feeding though to the Euro which now trades lower against both Sterling and the Dollar. The perceived safe haven of the Swiss Franc has also hit the headlines as the SNB announced a huge FX loss following large bouts of currency intervention earlier in the year. The continuing strength of the Swissy will be a real headache for the central bank as it fights to remain out of a potential deflationary spiral brewing in the Eurozone.

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