US Dollar Likely to Turn Higher as Markets Digest Bernanke Comments

US Dollar Likely to Turn Higher as Markets Digest Bernanke Comments

Talking Points

• US Dollar to Recover as Markets Digest Post-FOMC Bernanke Commentary
• Euro May Turn Lower as German CPI Drop Stokes ECB Rate Cut Outlook
• NZ Dollar Gains After RBNZ Rate Decision, Markets Dismiss Bollard Threat

The US Dollar (ticker: USDollar) declined overnight, with markets seeming to seize on comments from Fed Chairman Ben Bernanke saying policymakers were “prepared to do more” to help the economy if growth faltered, singling out additional QE as still “on the table”. Taken in isolation, the statement seemed to project the likelihood of another expansion of the balance sheet, weighing on the greenback amid returning dilution fears. This kneejerk reaction doesn’t seem to have staying power however as markets digest the remainder of Bernanke’s commentary.

Keeping QE3 “on the table” makes sense. After all, it would unreasonable to expect the Fed to do nothing if growth were to falter anew. Meanwhile, Bernanke made it clear that additional asset purchases were not favored, saying it would be “very reckless” to allow higher inflation for the sake of reducing unemployment. The central bank chief also added that the pledge to keep rates low through late 2014 was contingent on economic data and subject to revision if conditions were to warrant it (which presumably means rates can rise faster than the Fed currently expects). Coupled with upgraded growth, employment and inflation forecasts, this hardly seems to foreshadow additional stimulus in the pipeline at least over the near term.

The New Zealand Dollar outperformed after the RBNZ kept interest unchanged as expected. Central bank Governor Alan Bollard said the domestic economy was showing signs of recovery and predicted growth would pick up steam as reconstruction efforts in Canterbury following sharp earthquakes that rocked the area in February and June of last year. Here too however, the markets seemed to settle for half of the story, leaving room for a reversal. Bollard explicitly warned that if Kiwi remains strong despite waning commodity prices, the RBNZ will need to “reassess” its posture, giving the statement a discernibly dovish tone.

German Consumer Price Index figures headline the economic calendar in European hours, with expectations calling for the annual inflation rate to decline to 2 percent in April, marking the lowest reading in 14 months. Taken against the backdrop of modestly dovish commentary from ECB President Draghi yesterday and deeply disappointing Eurozone PMI numbers released earlier in the week, the outcome may weigh on the Euro as rate cut expectations build.

Draghi said risks to inflation were broadly balanced and stressed that the ECB was prepared to do what was needed in either scenario. Considering the ECB chief also predicted that price growth will remain above 2 percent this year, the drop on the German CPI reading squarely to that level may begin to drive speculation that the central bank will need to ease policy further.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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