Ben opens door to more QE as Obama slams it shut

After dipping briefly under 1.60 over the past week, the Sterling-Dollar pair snapped back sharply in late trading last night as firstly Fed Chairman Ben Bernanke refused to rule out further QE and secondly, after threatening to do so last month, Moody’s placed the US on review for a downgrade of its credit rating. Although Mr Bernanke did not outline much more than the market already knew from the minutes from the last Fed meeting, the fact that the words came from his mouth and not in text seemed enough of a reason for traders to sell the Dollar off against the Euro and Sterling, with cable jumping one and a half cents in quick time. The potential ratings downgrade came as US President Barack Obama walked out of budget talks, raising the fear that a deal on raising the US debt ceiling before the US Government runs out of money is looking increasingly unlikely. Later today US retail sales are due, and will probably show a modest decline, as retail sales ten to do over the summer months. On Friday we also have the US CPI number and the U of Michigan confidence survey.

With EU banking stress tests due late on Friday evening, we’ve had the first indication that some of the banks are struggling to pass. German public sector bank Helaba is rumoured to have pulled out, giving regulators a real headache the day before the results are due. The key point in doing a second round of stress tests was their credibility, and the fact that it would cover all systemically important EU banks. If Helaba pulling out marks the first of several banks following suit, the whole purpose of the project, namely to restore confidence in the European banking system will be undermined. After the market volatility in Italian bonds and bank shares, this mornings Italian Debt auction takes on more significance. With many economists suggesting Italy is too big to fail, any sign of weakness will be magnified hugely. Speculation is mounting that the ECB or Italian central bank may buy some of the bonds to signal to the market that demand is high and to keep yields suppressed. As we know with Greece, Ireland and Portugal when the cost of insuring the bonds raises above 400 basis points bad things start to happen; both Spain and Italy remain around 300. Even with all the negative Euro news, the news from the US yesterday evening has pulled the Euro higher against both Sterling and the Dollar.

Sterling looks like it had its day in the sun this week, when Tuesdays CPI figure surprised the markets to the downside. The next important data release comes next Wednesday with the Bank of England minutes but watch out for tomorrow’s Stress test results. Unless the tests turn out to be a total joke, several European lenders may fail and we need to be aware of the effects of that on British banks and the Euro going into Monday morning.