Euro, British Pound Advance Ahead of Fed Chairman Bernanke’s Testimony

Talking Points
•    Japanese Yen: Extends Advance Against Most Currencies
•    Pound: BoE’s Posen Holds Dovish Outlook for Inflation
•    Euro: Germany Fails to Grow in Fourth-Quarter
•    U.S. Dollar: Consumer Confidence, Richmond Fed Index on Tap

Euro, British Pound Advance Ahead of Fed Chairman Bernanke’s Testimony

The Euro halted the two-day decline against the greenback, with the exchange rate rising to a high of 1.3568 during the overnight trade, and the major currencies could face increased volatility going into the North American trade as Fed Chairman Ben Bernanke is scheduled to testify in front of the House Financial Services Committee on monetary policy. Nevertheless, European Central Bank board member Lorenzo Bini Smaghi argued that it would be a “mistake” to assume “the support of fiscal and monetary policies” alone would be able to end the global financial, and went onto say that “these policies may be seriously misguided if they are based on false expectations about the future” during a speech in Pavia, Italy.

Meanwhile, the final GDP reading for Germany showed economic activity held flat in the fourth quarter, led by a 1.0% drop in private consumption, and the data reinforces a weakened outlook for future growth as policy makers anticipate the labor market to deteriorate further over the coming months. The breakdown of the report showed capital investments slumped 0.7% during the last three-months of 2009, which was followed by a 0.6% drop in government spending, while exports advanced 3.0% from the third-quarter to top expectations for a 1.9% rise. At the same time, a separate report showed consumer confidence in Germany weakened for the fifth consecutive month in March, with the GfK survey slipping to 3.2 from a revised 3.3 in February, and households may turn increasingly pessimistic towards the economy as they continue to face fading demands for employment paired with tightening credit conditions. Meanwhile, industrial new orders in the Euro-Zone unexpectedly increased 0.8% in December after rising a revised 2.7% in the previous month, and the rebound in global trade may lead businesses to ramp up their rate of production as the world economy emerges from its first recession since the post-war period.

The British Pound pared the previous day’s decline to reach a high of 1.5477, but the lack of momentum to retrace the sell-off from the previous week may lead the GBP/USD to maintain the downward trend from the November high (1.6879) as the Bank of England holds a dovish outlook for future policy. BoE member Adam Posen expects price pressures to remain subdued after the central bank made a “big point” about the downside risks to the economy, and said that the MPC is prepared to take further steps if the board sees growth moving to the downside at a conference in London. In addition, Mr. Posen argued that the central bank will have to keep the door open to expand its asset purchase program as the outlook for growth and inflation remains uncertain, and went onto say that he does not expect to see a major shift in exchange rates as the British Pound stabilizes.

U.S. dollar price action was mixed overnight, with the USD/JPY extending the decline from earlier this week to reach a low of 89.97, and the greenback could face choppy price action during the North American trade as Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke are scheduled to testify in front of the Congress at 15:00 GMT. At the same time, the economic docket is expected to show a 3.2% rise in New Home Sales, with the annualized reading forecasted to increase to 353K in January from 342K in the previous month, and the slew of event risk scheduled for later today could shake up the currency market as investors weigh the prospects for future policy.


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To discuss this report contact David Song, Currency Analyst: jrivera@fxcm.com