Bernanke unimpressed by US upturn
The upturn we have seen in the US economy has peppered the financial headlines over the past few months. The US grew at an annualized pace of 3.0% in the further quarter of 2011, a figure which could well be revised upwards on Thursday. When the first quarter 2012 GDP figure emerges, this pace of growth is likely to have increased.
Nonetheless, US Federal Reserve Chairman Ben Bernanke remains distinctly cautious in his analysis of the US recovery. In a speech on Monday, Bernanke acknowledged that US data has been positive but refused to describe it as impressive. The US economy enjoyed similarly positive starts to 2010 and 2011 and failed to kick on, which may explain the Fed Chairman’s more guarded approach. The market seems to need little encouragement to jump on dovish rhetoric from the Fed and speculation as to QE3 has been reignited this week as a result.
There have been some increasingly hawkish comments from some US Federal Reserve Policymakers but Bernanke’s ever-dovish remarks have kept the greenback very much hemmed in. He will certainly take more convincing before QE3 is truly taken off the table. We believe the Fed is very much in wait and see mode and prepared to pull the trigger on QE3 should conditions worsen significantly, whilst we do not view the central bank to be close to doing so at present.
Today’s session brings a key US consumer confidence figure and the aforementioned revised US GDP figure will be announced on Thursday. If the dollar is to bounce back in the near-term, these figures really need to be positive.
The dollar’s recent poor performance does little to change our position that 2012 will be a strong year for the greenback, as the US economic divergence with the slowdown being seen across other major global economies takes effect.
Two MPC members vote for further QE and retail sector disappoints
Last week’s MPC minutes revealed that two members voted for a further increase to the Bank of England’s quantitative easing programme. The increased possibility of further QE in the UK is never going to be positive for GBP but as it has done in the last few months, it weathered the news well.
The two MPC doves, Miles and Posen, may have felt vindicated by last week’s poor UK retail sales, which undershot expectations to show a 0.8% monthly contraction. Nonetheless, the retail number was expected to be pretty soft after such a strong start to the year and again sterling recovered.
Elsewhere, eurozone growth data was very disappointing last week. Manufacturing and services figures for Germany, France and the eurozone as a whole all undershot expectations. This only firms our bet that the eurozone has entered what is likely to be a deep and painful recession.
Sterling is trading just below the psychological $1.60 level today, having recently found resistance at this key level. Whilst there is now a significant risk this level will be breached, we are still betting sterling will stall. Against the euro, sterling is well-supported in the €1.1950-€1.20 area, though it may require some strong UK growth figures at the beginning of next month for sterling to push much higher.
End of week forecast
GBP / EUR 1.20
GBP / USD 1.59
EUR / USD 1.3250
GBP / AUD 1.5250
Richard Driver
Currency Analyst
Caxton FX
