The US dollar started the week on a positive note with strength across the board. However, the market demonstrated a degree of surprise and confusion when rumours began to spread that Federal Reserve Chairman Ben Bernanke might not trim the stimulus in September as expected. On Wednesday, Bernanke confirmed these rumours reiterating his previous statements that he will wait until he sees tangible evidence that the US economy is improving before he will consider trimming the stimulus. With a higher than desired unemployment rate, Bernanke said the stimulus may not begin being trimmed until later this year or the middle of next year.
The USD initially responded to Bernanke’s announcement with strength against all the majors, but his comments did not have a strong enough impact to maintain lasting strength and the USD dropped back to its previous levels later on Wednesday. The market will continue to closely watch the USD, with unemployment claims due and Bernanke due to answer questions from policymakers today.
Earlier in the week, both the euro and the yen strengthened against the USD, with USD/JPY dropping from 100.523 on Monday 15 July to 99.233 on Tuesday 16 July before USD/JPY strengthened from 99.038 to 100.161 on Wednesday 17 July in response to Bernanke’s comments. Despite the indications of mixed fortunes for USD, the yen is still struggling with stronger than expected GDP data from China weighing the currency down. G20 bank ministers are also meeting this week and are expected to endorse the Bank of Japan stimulus. Bank of Japan Governor Kuroda has said he is still targeting a 2% inflation rate and he is willing to increase the stimulus to reach this target.
Conversely, European Central Bank President Mario Draghi is not doing anything to intervene further in the Eurozone’s economy for now. He has stated he is ready to act if he needs to, however he seems to be waiting for Bernanke to make the first move in the hope that the trimming of the US stimulus forces a weakening of the USD and a corresponding strengthening of the euro. However, the on-going concerns about Portugal and Greece’s financial health may force Draghi to take action earlier.
The British pound fell earlier this week in advance of the minutes from the latest Bank of England meeting which were released on Wednesday. Sterling dropped early on Tuesday 16 July from 1.5142 to 1.5044 on fears that new Bank of England Governor Carney may have voted for further bond purchases – an indication that the economy needs more stimulus to recover. However, the minutes revealed that this was not the case and instead the Bank of England will keep its bond purchases at £375 billion pounds. The market responded positively with GBP boosted to 1.5267.
The Australian dollar has been showing some resistance to the recent drops in price. It is somewhat of a paradox because the Reserve Bank of Australia is expected to announce a cut in interest rates next week to a record low of 2.5%, however the positive data from China has spurred the buying of AUD this week and a subsequent strengthening in the currency. Traders should carefully monitor AUD/USD as a reversal in fortunes is likely in the case of an interest rate cut.
Early in the week, gold was trading in a fairly steady trading pattern, making small movements up and down in reaction to other market announcements, but no clear direction had broken out. After Bernanke’s statement on Wednesday, gold quickly weakened from $1300 an ounce to $1270 before finding a steady level to trade around $1276.
Oil prices have been slowly climbing, rising from $104.63 a barrel on Monday 15 July to $106.88 a day later. The boost has been spurred by a year on year increase in demand from China of 11%. It is possible that we may even see the oil price hit a high of $110 a barrel in the coming weeks.
What to watch this week:
EUR/USD, GBP/USD and USD/JPY – volatility is likely in these pairs in response to further comments from Bernanke about monetary stimulus for the US economy.
AUD/USD – while this pair is comparatively less volatile than other majors, when it does experience volatility the fluctuations can be substantial.
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