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4 FX News Stories Overshadowed by Bernanke

4 FX News Stories Overshadowed by Bernanke

Kathy Lien, Technical Strategist

With Fed Chairman Bernanke’s Congressional testimony stealing the spotlight, it would be easy to overlook the latest news and events from other key central banks around the world this week.

Aside from the Congressional testimony from Fed Chairman Ben Bernanke, Wednesday is also a big day for the British pound (GBP). The Bank of England (BoE) will be releasing the minutes from the very first meeting led by new central bank Governor Mark Carney. As the new BoE Governor, Carney has made transparency a priority for the central bank.

The minutes will give us a better sense of his overall degree of dovishness. Carney's decision to release a more detailed monetary policy statement after the last meeting raised skepticism about the strength of the UK recovery that was later validated by weaker industrial production and trade figures.

In particular, we will be watching the tally of votes. Former BoE Governor Mervyn King voted in favor of more asset purchases at his final meeting, and if Carney does the same, we could see a renewed selloff in GBPUSD because this would serve as a reminder of the BoE's dovishness.

If Carney votes for steady policy, however, GBPUSD could soar, as this would leave the Monetary Policy Committee (MPC) less dovish as a whole.

In addition to the BoE minutes, UK labor market numbers are also scheduled for release. Jobless claims are expected to drop by about the same amount on the back stronger service sector job growth.

Tuesday’s UK data showed that CPI declined in June due to summer discounting. Consumer prices fell 0.2%, but on an annualized basis, CPI growth accelerated to 2.9% from 2.7%. The impact on sterling was short-lived, however, as investors realized that the CPI report would not have a dramatic impact on BoE policy in the near term.

Bank of Canada (BoC) Rate Decision Due on Wednesday

The Canadian (CAD), Australian (AUD), and New Zealand (NZD) dollars all traded sharply higher against the greenback on Tuesday. While the AUD was the day's best performer, the focus for Wednesday shifts to the Bank of Canada (BoC), which is scheduled to deliver its latest monetary policy decision.

The BoC is not expected to change interest rates, but as usual, the bias of the central bank can affect how the currency trades.

This will be the first meeting led by new BoC Governor Stephen Poloz, and he is expected to repeat the BoC's view that "the considerable monetary stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with the 2 per cent inflation target." Any deviation from that script could cause undue volatility in the Canadian dollar.

Since the last monetary policy meeting, we have seen more deterioration than improvement in Canada's economy. Manufacturing activity slowed significantly in the month of June, labor market growth stagnated (albeit after a very strong month), GDP growth slowed, and retail sales excluding autos dropped for the second month in a row. So if there is a shift in bias, it would most likely be towards more caution than optimism.

Meanwhile, the Australian dollar soared on the back of the latest Reserve Bank of Australia (RBA) meeting minutes. While policymakers were still concerned about the downside risks facing the economy, they felt that the inflation outlook was less benign, and when combined with their view that the current level of monetary policy is “appropriate," a short squeeze drove the AUDUSD sharply higher.

With speculative AUDUSD short positions near record highs according to the CFTC’s latest report, we would not be surprised if the AUDUSD rally extended for a few more days, especially if Fed Chairman Bernanke's speech ends up driving the US dollar lower.

Bank of Japan (BoJ) Minutes in Focus, Too

With no major Japanese reports on the economic calendar this week, there has been very little consistency in the performance of the Japanese yen (JPY). Japan's currency strengthened against the euro (EUR), British pound, and US and Canadian dollars, but weakened against the Aussie and Kiwi.

Amidst limited data, all eyes will be on the minutes from the June 10-11 Bank of Japan (BoJ) monetary policy meeting. Many will recall that the BoJ left monetary policy unchanged, and by denying Japan additional stimulus at such a volatile time, the Bank sent a strong message that central banks won't be held hostage by market volatility and that investors should not expect the spigots to be opened every time rallies are reversed.

By Kathy Lien of BK Asset Management

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