Weekly Fundamentals: A slowing of US Federal Reserve asset purchases

A slowing of US Federal Reserve asset purchases is still in the balance with many officials wanting more gains in the jobs market first, according to minutes of its most recent meeting. The minutes show that Ben Bernanke, Fed chairman, was not signaling a definite “tapering” of quantitative easing from $85bn a month at his June press conference but trying to be clearer about the conditions that would trigger it.
Ben Bernanke said he was concerned about the slow rate of progress in growth and therefore the interest will continue to be low until economic recovery. After the minutes of the Federal Reserve were exposed about stopping the QE this year, said the Fed chairman over the podium and stated "You have to be patient, I'm waiting to see steady growth." Bernanke referred to the U.S. economy and said "We see that the job market is advancing, a positive trend in growth and the housing market is recovering, but let’s see these markets maintain the current trend." Bernanke added "Note to inflation. Inflation target of the Federal Reserve stands at 2%, while lower inflation rate increases the risks of deflation, which eventually leads to stagnation.

Last week, the Euro continued to drop against the Dollar and lost long term uptrend support, falling to its lowest level since early April, following the European Central Bank (ECB) officials hint that interest rates will remain low for a period of over 12 months. In the meantime, the Eurogroup released some bailout aid to Greece deciding to give only a portion of the scheduled 8.1 billion, due to the Greek’s failure to meet bailout terms. The euro did enjoy developments on the other side of the Atlantic: the FOMC meeting minutes and Bernanke’s bearish comments sent the dollar tumbling down hundreds of pips and EUR/USD challenged 1.32 before consolidating on lower ground and closing at 1.3066.

The US dollar gained some points against the Yen early last week and climbed above the 101 line. However, Bernanke’s statement on Wednesday sent the pair below 100 into almost 300 pips rally until finally closed 99.21. The Bank of Japan issued a more upbeat assessment of the Japanese economy on Thursday, saying for the first time in more than two years that conditions were “recovering”. The central bank’s growing optimism suggests it believes the aggressive monetary easing measures it implemented in April are working to stimulate the economy and reverse consumer-price deflation, and is unlikely to take additional steps soon.

The AUD/USD had a rollercoaster week starting very strong, the firmer dollar tone from last Friday has allowed the Aussie to start the week just above the 0.90 level, with the domestic backdrop still offering few reasons to be bullish. On Friday less than estimated Home Loans combined with good PPI release from the US sent the pair to challenge the 0.9 level until settled at 0.9047 to close the week.

The GBP/USD had a positive run this week after dropping for 3 weeks. The pound started the week with a mild bullish trend up to the Manufacturing Production release on Tuesday, which came short and sent the pair to 1.4812. The Federal Reserve release followed by Bernanke’s conference signaled this week major switch of play sending the dollar to the curve and the pound rocking above the 1.51 level. The pair closed the week at 1.5105.

Important events this week:

Monday
· USA - Core Retail Sales m/m and Retail Sales m/m.

Tuesday
· New Zealand - CPI q/q.
· Australia - Monetary Policy Meeting Minutes.
· Germany - ZEW Economic Sentiment.
· UK - BOE Inflation Letter.
· Canada - Manufacturing Sales m/m.
· USA - Core CPI m/m.

Wednesday
· UK - Claimant Count Change, MPC Asset Purchase Facility Votes and MPC Official Bank Rate Votes.
· USA - Building Permits and Fed Chairman Bernanke Testifies.
· Canada - BOC Rate Statement, Overnight Rate, BOC Monetary Policy Report and BOC Press Conference.

Thursday
· UK - Retail Sales m/m.
· USA - Unemployment Claims, Fed Chairman Bernanke Testifies and Philly Fed Manufacturing Index.

Friday
· Canada - Core CPI m/m.