Ben Bernanke comments spark US dollar sell-off

IMAGE: US Fed Chairman Ben Bernanke

British Pound Sterling / US Dollar

The main story in the currency markets yesterday was the sharp sell-off in the USD after unexpectedly dovish comments from Ben Bernanke.

Speaking at the National Association for Business Economics Annual Conference, the Fed Chairman said he was unsure if the recent improvement in employment numbers could be sustained and that an accommodative monetary policy stance is needed to spur job growth.

Investors took this rhetoric to mean that the Fed will be keeping U.S. interest rates very low which subsequently drove demand for higher yielding assets, sending the S&P 500 Index to its highest level since 2008. Risky FX rallied higher as the greenback got dumped across the board, with GBP/USD moving above last week’s high of 1.5923 to reach a high of 1.5973 before consolidating its gains for the day.

The U.K. economic data docket is sparse again today with only the CBI Distributive Trades Survey to look forward although this release hasn’t garnered too much market focus in the past. On the other side of the pond we have some more important numbers including the S&P/Case Schiller Composite Home Price Index, Consumer Confidence, and the Richmond Fed Manufacturing Index.

Risk sentiment will continue to be the most important driver of cable today, with the pair looking to retain its upward momentum to break through the 1.60 level. Looking from a technical standpoint a break and hold above this level opens a move to 1.6170 (October and November 2011 highs). GBP/USD has held firm overnight and opens this morning at 1.5980.

We expect a range today in the GBP/USD rate of 1.5840 to 1.6030

Euro

The much anticipated German IFO number was able to lend the 17-nation currency some early support on Monday, coming in slightly above analyst expectations, with the business climate figure rising 0.1 to 10.8 in March.

Also encouraging was the Italian consumer confidence number which improved to 96.8 in March from 94.4 a month earlier. Continued chatter surrounding the proposed measures to combine the EFSF and ESM to increase the European sovereign debt firewall also helped firm up the single currency early on, bolstered by comments from EU Commissioner Rehn stating that the decision on the measures will be made at the European Finance Ministers meeting later this week.

The dovish comments surrounding the U.S. economy from Fed Chairman Bernanke were the trigger for moves higher in the EUR/USD on the day as the pair jumped 100 points after the comments were made and subsequently EUR/GBP was dragged higher, touching an intraday high of 0.8370 (1.1947).

Another euro supportive factor on Monday was the decline in Spanish borrowing costs as Spanish government bond yields fell to 5.31% from 5.38% at the end of last week.

Today we have German Gfk consumer confidence figures for March, which are expected to improve slightly and this will certainly attract some market attention. That being said, focus will now start to move to the Eurogroup Finance Ministers meeting due to take place at the end of this week. GBP/EUR opens this morning at 1.1971.

We expect a range today in the GBP/EUR rate of 1.1920 to 1.2030

Australian Dollar and New Zealand Dollar

The commodity currencies gained against the greenback on Monday thanks to broad USD weakness on the back of Bernanke’s comments and higher commodity prices.

AUD/USD rallied from 1.0439 to 1.0530 and NZD/USD rallied from a start at 0.8156 to touch a high of 0.8221 as investors sought out higher yielding assets against the renewed expectations that the U.S. Federal Reserve will keep interest rates close to zero for an extended period. Price action on the crosses was flat, but bearish, with GBP/AUD trading in a 1.5127-1.5160 range and price action in GBP/NZD was similar with the pair trading in a narrow 1.9363-1.9413 range. Overnight trade in the commodity currencies has been subdued, although the Australian Dollar was initially sold off on the back of poor Chinese industry-profit data but recovered shortly afterwards.

GBP/AUD and GBP/NZD open this morning at 1.5168 and 1.9376 respectively.

We expect a range today in the GBP/AUD rate of 1.5020 to 1.5300

We expect a range today in the GBP/NZD rate of 1.9290 to 1.9500

Data Releases

AUD: RBA Financial Stability Review

EUR: German Gfk Consumer Climate, French Consumer Confidence

GBP: CBI Distributive Trades Survey

NZD: No data due

USD: S&P/CS Home Price Composite Index, CB Consumer Confidence, Richmond Manufacturing Index

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