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USD Slides Following China Rate Cut, All Eyes On Bernanke Testimony

By , Currency Analyst
07 June 2012 13:30 GMT

Talking Points

  • U.S. Dollar: Correction Gathers Pace On China Rate Cut, All Eyes On Bernanke
  • Euro: RSI Carving Upward Trend, Spain Faces Higher Finance Costs
  • British Pound: Testing Former Support, BoE Holds Current Policy

U.S. Dollar: Correction Gathers Pace On China Rate Cut, All Eyes On Bernanke

The greenback weakened further on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a fresh weekly low of 10,143, and the rise in risk sentiment may continue to dampen the appeal of the reserve currency as market participants see the international community increasing its effort to tackle the debt crisis. Indeed, the People’s Bank of China lowered its one-year lending rate by 25bp, which will take effect on June 8, and it seems as though the world’s second-largest economy will continue to embark on its easing cycle as the debt crisis continues to dampen the outlook for global growth.

As market participants turn their attention to Fed Chairman Ben Bernanke’s testimony in front of Congress, the fresh batch of central bank rhetoric is likely to heavily impact the USD, and a slew of dovish commentary may further weaken the greenback as market participants increase bets for another round of quantitative easing. However, as Fed officials continue to take note of the more robust recovery, it will be increasingly difficult for the central bank head to justify QE3, and we may see Mr. Bernanke strike a more balanced tone for monetary policy as the recovery gradually gathers pace. In turn, we will pay close attention to his fundamental assessment for the U.S. economy, and we may see the dollar regain its footing should the Fed chairman strike an improved outlook for growth and inflation.

Euro: RSI Carving Upward Trend, Spain Faces Higher Finance Costs

The Euro rallied to 1.2610 amid the rise in risk-taking behavior and the rebound in the EURUSD may turn into a larger correction as the global movement to ease policy helps to prop up market sentiment. Indeed, Spain sold EUR 2.07B in bonds yielding 6.044% versus the EUR 2.0B target, but heightening finance costs across the region continues to raise the threat for contagion as European policy makers look to buy more time. In turn, it seems as though the European Central Bank is getting ready to act in July, but the Governing Council may have little choice but to carry out its easing cycle throughout 2012 as the fundamental outlook for the region turns increasingly bleak. As the EURUSD struggles to push back above the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, we may see the pair face range-bound price action over the near-term, but we will be keeping a close eye on the relative strength index as it appears to be forming an upward trend.

British Pound: Testing Former Support, BoE Holds Current Policy

The British Pound showed a fairly muted reaction to the Bank of England interest rate decision as the central bank stuck to its current policy in June, but we’re seeing the GBPUSD come up against former support around the 1.5600 as currency traders increase their appetite for risk. As the BoE refrains from releasing a policy statement, market participants will certainly look forward to the meeting minutes due out on June 20, and another 8-1 vote count may instill a bullish outlook for the sterling as it dampens speculation for more quantitative easing. As central bank officials anticipate to see a more robust recovery later this year, we should see the Monetary Policy Committee preserve its wait-and-see approach throughout 2012, and the board may continue to move away from its easing cycle amid the stickiness in underlying price growth. If the GBPUSD fails to clear 1.5600, we should see the pair track sideways ahead of the BoE Minutes, and the pound-dollar may build a short-term base in June as it continues to hold above the 50.0% Fib from the 2009 low to high around 1.5270.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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07 June 2012 13:30 GMT