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Dollar Aims Higher on Key Bernanke Testimony

Dollar Aims Higher on Key Bernanke Testimony

Kathy Lien, Technical Strategist

While Fed Chairman Ben Bernanke avoided definitive comments about the end of quantitative easing (QE), his testimony, coupled with positive consumer and housing data, will help prop up the dollar.

The big focus during today’s North American session is on Federal Reserve Chairman Ben Bernanke's semi-annual testimony on the US economy and monetary policy. Based on his introductory comments, it doesn't sound like Bernanke is convinced that the central bank needs to start tapering off asset purchases.

At the same time, however, he also didn't dismiss the idea outright, which may be enough to keep the dollar bid on a day with very strong economic data. Bernanke started his testimony by saying that the benefits of easing outweigh the costs, but he went on to add that the Fed has the tools to tighten monetary policy, and that more quantitative easing (QE) may erode confidence in the Fed's ability to exit.

Concerns about unwinding asset purchases are the main motivation behind the calls to phase out asset purchases, and it appears that in some ways, Bernanke shares this view. However, with the job market remaining "generally weak" and inflation well anchored, the Fed Chairman isn't in a rush to talk about exit strategies and instead confirmed that the central bank intends to sustain easing for as long as needed.

Economic growth is picking up this year, but Bernanke is worried that the sequestration could cause significant economic burden, and for this reason, the well-mannered dove does not want to rush to any conclusion.

So far, Bernanke is neither supporting the idea of ending quantitative easing nor defending it vigorously, which for the time being, is keeping the dollar bid against all currencies except for the Japanese yen. There is still a Q&A session that will most likely go into lunchtime on Tuesday, so keep an eye on the headlines for any further clarity on his stance.

Meanwhile, the morning's US economic reports should ease some of Bernanke's concerns about the economy and make the members of the Federal Open Market Committee (FOMC) who support tapering off asset purchases more confident in their views.

Consumer confidence soared and new home sales rose by the largest amount since April 1993. The Conference Board's consumer confidence index hit 69.6 in the month of February, up from 58.6. Improvements in the labor market and rise in equity market valuations made investors more optimistic about present and future conditions, and this uptick is consistent with other sentiment reports.

The housing market is also gaining momentum, according to the Commerce Department, which reported a 15.6% increase in new home sales. This was the biggest increase in nearly two decades and brought the total amount of new homes sold to the highest level since 2008.

The only problem is that the average price of a home sold dropped 5%, but at least these homes are remaining on the market for a shorter period of time. There are definitely signs of increasing momentum in the housing market, and this, along with the rise in consumer confidence and manufacturing conditions in the Richmond region, will sit well with the central bank.

New to FX? Register for this free 20 minute course HERE and learn common FX terms like leverage and how to implement conservative trading strategies.

By Kathy Lien of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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