Bernanke speech the focus

Although Fed Chairman Ben Bernanke has hinted that further Quantitative Easing is unlikely, saying instead the Fed is committed to keeping interest rates low until at least 2013.  The markets are eagerly awaiting his speech on Friday.  Mr Bernanke indicated QE2 was on the way from Jackson Hole this time last year, and the markets responded better than even he could have predicted. One of the aims of zero interest rates and QE is to force money into risk assets, and it looks like equity markets are setting up for the expectation of a further round of easing being announced. But they may be bitterly disappointed. The key differences from last time are that the spectre of deflation, one of the key motivators for QE2, is not the threat it was a year ago and there is also dissent from 3 Fed board members further clouding the Feds ability to implement any new round of QE.

So how does the Fed’s announcement impact FX markets? Safe haven currencies such as the Swiss franc, Aussie Dollar and the Scandinavian Krona’s look set to be very dependant on the outcome of Friday’s speech. They have all benefitted from diversification out of Dollars and the prospect of further money printing by the US so we can expect significant moves in both directions depending on the content. Special attention needs to be paid to the Swisse which has the SNB on the other side of the trade should QE3 go ahead.

Along with the US announcement (or not) Friday also sees UK GDP figures released. If we take the overall tone of recent UK data as a guide it is hard to be optimistic about UK growth. There seems to be significant economic headwinds, set to get stronger as government spending continues to fall and companies hoard cash instead of hire workers. In line with forecast is the best we can hope for. Later in the day, but before said speech, US GDP is also released along with the University of Michigan confidence survey.